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If you default on your federal student loans, the government can typically force you to pay without a court order through administrative wage garnishment. With this process, your student loan servicer is able to collect 15% of your paycheck to automatically go towards loan repayment.

Wage garnishment can happen if you’ve missed payments on federal student loans for at least nine months (and haven’t entered an agreement with your lender to pay them back), and may continue until your loan is paid in full or the default status is resolved. Your wages can also be garnished if you default on private student loans, but the process works differently.

Learn what you can do to avoid wage garnishment on your student loans, plus how to get help with student loan garnishment once it has started.

What Is Administrative Wage Garnishment?

Administrative wage garnishment (AWG) is a debt collection method at the federal level. A federal agency can require a non-federal employer to withhold money from an employee’s paycheck to pay for a debt.

Typically, an employer may withhold up to 15% of your wages to repay a defaulted student loan. However, if you have multiple loans in default with different companies or have an existing child support order, garnishment can increase to 25%.

For federal student loans, you must have missed 270 (or nine months of) payments before your loan goes into default and the government can garnish your wages. The time-frame for default and garnishment can vary for private loans, and will depend on the policy of the lender.

With federal student loans, wage garnishment can take place without your servicer taking you to court. With private student loans, on the other hand, most states require lenders to obtain a court order to garnish your wages if you default on a loan.

Generally, wage garnishment can continue until your loan balances plus interest and fees are paid back, or your loan is removed from default.

An important note about federal student loans: The U.S. Department of Education is providing a temporary “on-ramp” to repayment between October 1, 2023 and September 30, 2024 to protect federal borrowers from the worst consequences of not making their student loan payments. During this transition period, servicers aren’t reporting missed, late, or partial payments as delinquent. In addition, loans will not go into default.

For borrowers who defaulted on their loans prior to March 13, 2020, the Education Department has created a Fresh Start program , which temporarily offers special benefits for borrowers to help them get out of default (more on this program below).


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

How Does Administrative Wage Garnishment Affect Student Loans?

If your federal student loan goes into default, the Education Department (the lender) is required to send you a notice of wage garnishment by mail to the last known address 30 days before wage garnishment starts. This notice must inform you of the nature and amount of the debt and the agency’s intention to initiate garnishment.

You’ll be given the option to establish a voluntary repayment agreement as well as to request a court hearing.

If you don’t do either, wage garnishment will start. Your employer is required to comply with a wage garnishment request from the government. You’ll continue having money garnished from your paycheck until your loan is paid in full or has been removed from default.

If you request a hearing within the 30-day window, the government isn’t allowed to take money from your paycheck until the hearing is over and a decision is made.

With private student loans, wage garnishment follows a different process. For starters, private lenders may consider your loan in default after you’ve missed payments for three (rather than nine) months, though the time frame varies by lender. Once you default, a private lender may assign your loan to their collections department or sell your loan to a third party debt collection agency. The lender or collector must then sue you, take you to court, and receive a court order before they can garnish your wages.

Recommended: Understanding Student Loan Requirements

How to Protect Yourself From Student Loan Wage Garnishment

Making your student loans payments on time and in full is the simplest way to protect yourself from student loan wage garnishment.

If you’re having trouble keeping up with your payments, the best time to take action is when you begin missing student loan payments and before you actually default on the loan. At this point, you’ll want to reach out to your loan servicer to discuss options that can help keep your loan in good standing. Here are some to steps that can help:

•   Look into deferment and forbearance. The federal government has several deferment and forbearance options available, and some private lenders also offer forbearance programs. Keep in mind, though, that interest will likely still accrue on your loans during the deferment or forbearance period, which can make your loan more expensive in the end.

•   Switch repayment plans to get a lower monthly payment. The Education Department offers a number of different repayment plans, including long-term plans that can last up to 30 years. You may be able to lower your monthly payment if you opt for a longer repayment term. Extending your repayment term generally means paying more in interest overall, though.

•   Request an income-driven repayment plan. Income-driven repayment plans let you pay a percentage of your discretionary income toward federal loans for 20 to 25 years, at which point the remaining loan balances are forgiven. For some people, payments on an income-driven repayment plan can be as low as $0 per month.

•   Refinance your student loans for a cheaper rate. If you can qualify for a lower interest rate, refinancing your student loans with a private lender can lead to lower monthly payments. If you have multiple loans, it can also simplify repayment by consolidating them into one loan. Just keep in mind that refinancing federal loans with a private lender means giving up federal protections like deferment, forbearance, and access to income-driven repayment plans.

💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.

Stopping AWG Orders

If your loans are already in default, you’ve received notice of wage garnishment, or you’re currently having your wages garnished, here are four steps you can take to remedy the situation.

1. Negotiate a Loan Settlement

You may be able to negotiate a loan settlement with a collections agency. Consider offering a lump sum or series of installment payments, and be sure to mention any specific financial hardships or medical issues you’re experiencing. A private lender or debt collector may be willing to settle the loan for less than the amount owed, such as principal and 50% interest or 90% principal and interest, or waive the collection fee (which may be 10% to 15% of the loan balance).

It is generally difficult to negotiate a loan settlement deal with federal student loans. Because federal loan servicers have multiple ways to recoup their money, including AWG, they have less incentive to negotiate with borrowers. You can only qualify in extenuating circumstances, and you’ll likely still have to pay the majority of your debt.

2. Consolidate Defaulted Student Loans

If you have a federal loan already in default, you might consider loan consolidation. This allows you to pay off defaulted federal loans with a new loan (called a Direct Consolidation Loan) and new repayment terms. To consolidate a defaulted loan, you need to either agree to repay your new loan under an income-driven repayment plan or make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before consolidation.

Keep in mind that eligible borrowers will be able to use the Fresh Start program to get out of default without having to consolidate.

Also note that if you want to consolidate a defaulted loan that is being collected through wage garnishment, you can’t consolidate the loan unless the wage garnishment order has been lifted or the judgment has been vacated.

3. Enter Fresh Start or a Loan Rehabilitation Program

Normally, one of the main ways to get out of federal student loan default is by rehabilitating your loans. Right now, however, loan rehabilitation has been temporarily replaced by the Fresh Start program.

Fresh Start is a short-term, one-time program to provide relief for borrowers with defaulted federal student loans. Fresh Start automatically gives you some benefits, such as restoring access to federal student aid (including federal loans and grants). To use Fresh Start to get out of default and claim the full benefits of the program, you must contact your loan holder.

After September 2024, when Fresh Start ends, loan rehabilitation will be an option again. Loan rehabilitation is a program offered by the federal government that involves entering into a repayment agreement to get your loan out of default and back into good standing. If you make a certain number of consecutive payments on time under the rehabilitation agreement, you can get your loan out of default and avoid wage garnishment. Contact your loan holder for more information.

Private lenders typically don’t offer a formal loan rehabilitation option. However, if you’ve defaulted on your private loans, it’s worth reaching out to your lender and see what payment assistance programs they provide.

4. Dispute the Wage Garnishment

If you receive a wage garnishment notice from the federal government, you have the right to dispute the notice and request a hearing, in writing, within 30 days.

This could be a good option if you do not agree that you owe the student loan debt you’re being asked to pay, disagree with the amount, or believe you weren’t properly notified about the garnishment.

You may also ask for a hearing if you believe that wage garnishment could create an extreme financial hardship in your life, or if you have been employed for less than 12 months after losing a previous job.

If any of these scenarios ring true, be sure to make a request for a hearing in writing and that the letter is postmarked no later than 30 days from the date the wage garnishment notification was sent. You’ll also want to include proof to support your objections to the debt or the garnishment.

Student Loan Refinancing Tips

If you’re in danger of wage garnishment, refinancing your loans could be a way to get back on top of repayment. Refinancing involves getting a new student loan with a private lender and using it to pay off your existing federal or private student loans.

Refinancing can potentially allow you to lower your monthly payment by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.)

If you decide refinancing is right for you, it’s a good idea to assess your credit health, research lenders, and shop around for the best rates. If a lender offers a prequalification tool, consider taking advantage — these applications require only a soft credit inquiry on your credit report. Getting prequalified can help you see the rates and loan terms you might qualify for if you refinanced.

FAQ

How are administrative wage garnishments used?

Administrative wage garnishment is a debt collection process that allows a federal agency to order a non-federal employer to withhold up to 15% of an employee’s disposable income to pay a past-due (non tax) debt owed to the agency. For federal student loans, you typically must miss nine months of payments before the government can begin wage garnishment.

What happens if you get your wages garnished?

Wage garnishment happens when a court (or federal agency) orders that your employer withhold a specific portion of your paycheck and send it directly to the creditor or lender until your debt is resolved. Common sources of wage garnishment include child support, consumer debts, and student loans. Your wages will be garnished until the debt is paid off or otherwise resolved.

How do you respond to a wage garnishment?

First, you’ll want to carefully read the judgment to verify that all of the information is accurate. If you believe the garnishment was made in error, you can file a dispute.

If the garnishment is justified, it’s a good idea to call the creditor or loan servicer to see if you can work out a payment plan that brings the loan back to good standing and allows you to pay it off in a way that works with your budget. Or, you can simply accept the wage garnishment and pay off the debt in the installment plan instructed by the judgment.

Photo credit: iStock/fizkes

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Income-driven repayment (IDR) plans adjust your monthly student loan payments to a percentage of your discretionary income. Depending on your income and family size, you could have a payment as low as $0.

In this case, you can pay nothing on your student loans without falling into delinquency or default. Plus, you’ll still be making progress toward loan forgiveness, which you can receive after 20 or 25 years on an IDR plan.

Your $0 monthly payments can also count toward Public Service Loan Forgiveness (PSLF), which offers loan forgiveness after 10 years of working at a qualifying not-for-profit or government agency.

That’s the topline on this situation. Read on to learn more about how qualifying for $0 student loan bills on an IDR plan can impact your payment obligations and progress toward loan forgiveness.

What Are Income-Driven Repayment Plans?

When paying back student loans, you have the option of applying for an income-driven repayment plan. An IDR plan can be a good fit if you’re looking to reduce your monthly payments, since it adjusts your bills to a percentage of your discretionary income.

There are four options for income-driven repayment:

•   SAVE: The SAVE plan, which replaces the REPAYE option, adjusts your payments to 10% of your discretionary income. It calculates that as the difference between your annual income and 225% of the poverty guideline for your family size and state. It has the most generous interest subsidy of all the IDR plans, as the government will cover any unpaid interest from month to month. Starting in the summer of 2024, the SAVE plan may also offer loan forgiveness after 10 years, depending on your loan amount and type. Plus, it will slash payments on undergraduate student loans to 5% of your discretionary income.

•   Pay As You Earn (PAYE): The PAYE plan also adjusts your payments to 10% of your discretionary income, but the discretionary income calculation is less generous at 150% of the poverty guideline. It offers loan forgiveness after 20 years.

•   Income-Based Repayment: On this plan, you’ll pay 10% or 15% of your discretionary income for 20 or 25 years, depending on when you borrowed your loans.

•   Income-Contingent Repayment: This plan is the least generous of the IDR plans. It sets your payments at 20% of your discretionary income, which uses 100% of the poverty guideline. However, ICR is the only income-driven plan available for parent loans.

💡 Quick Tip: Ready to refinance your student loan? You could save thousands.

Student Loan Forgiveness Overview

Most income-driven repayment plans offer loan forgiveness at the end of your repayment term. Currently, all the plans require 20 or 25 years of repayment before you can get your remaining balance forgiven.

Starting in July 2024, though, the SAVE plan will offer a faster path to loan forgiveness for some borrowers.

•   Specifically, you can get forgiveness after 10 years on SAVE if your original balance was $12,000 or less.

•   Another year will be added to your repayment term for each additional $1,000 you borrowed, up to a total of 20 years for undergraduate student loans and 25 years for graduate student loans or a mix of both.

Keep in mind that you might have to pay taxes on any loan forgiveness you receive from an IDR plan after 2025. Prepare to pay this final student loan bill before you can say goodbye to your federal student debt.

Recommended: Guide to Student Loan Transfers

If My IDR Plan Is $0, Does It Count Towards Payments for Forgiveness?

The answer to “What is the minimum student loan repayment?” can, in fact, be zero. And if your IDR plan doesn’t require you to pay anything on your student loans, you may be relieved to hear that your IDR student loan $0 monthly payments will still count toward student loan forgiveness. Even though you’re not paying anything, you’ll still be making progress toward the 20 or 25 years of required payments to get your loans forgiven.

If you’re pursuing loan forgiveness through the PSLF program, you’ll get credit for your $0 payments for that as well. You need to make 120 payments on an IDR plan, along with working in eligible public service full-time, to qualify for PSLF. Unlike the loan forgiveness you get from an IDR plan, the forgiveness you get from PSLF is not taxable.

Keep in mind, though, that your payments may not stay at $0 forever. You must recertify your income and family size on an annual basis so your loan servicer can recalculate your income-based repayment plan. If your circumstances change, your monthly payment on an IDR plan could increase.

Should I Refinance My Student Loans Instead?

If you’re looking for strategies to manage your student loans, refinancing is another option. When you refinance student loans, you exchange one or more of your existing loans from a private lender.

On the plus side:

•   If you have good credit and steady income, you could qualify for a better interest rate than you have now. Reducing your interest rate could save you money over the life of your loans and help you pay off your debt faster.

•   You’ll also get to choose new terms for paying off your student loan. You could choose a short term to pay off your debt sooner or a longer term of 15 or 20 years to reduce your monthly payments. Keep in mind that a longer term can mean you pay more interest over the life of the loan.

Refinancing does have some risks, though, that are important to understand before you apply.

•   Specifically, refinancing federal student loans means losing access to federal benefits and protections, such as income-driven repayment plans and forgiveness options.

If you want to use income-driven repayment, pursue loan forgiveness, or take advantage of another federal perk, it wouldn’t be wise to refinance your federal student loans with a private lender. However, refinancing high-rate private student loans could be advantageous if you can get a better interest rate.

Recommended: Why Your Student Loan Balance Never Seems to Decrease

The Takeaway

Income-driven repayment can be a lifesaver if you’re struggling to afford your monthly student loan payments. An IDR plan will limit your payments to a percentage of your income while extending your loan terms to 20 or 25 years. If you still owe a balance at the end of your term, the rest will be forgiven.

Depending on your finances, you could get a payment as low as $0 on an IDR plan, but you’ll still get credit toward loan forgiveness. Keep in mind, though, that you may be in repayment for a long time on an IDR plan before you can say goodbye to your student loans.

You may also want to consider refinancing them for better rates and new repayment terms.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

How do I qualify for a $0 student loan payment?

You may be able to qualify for a $0 student loan payment on your federal student loans through an income-driven repayment plan. These plans calculate your monthly payments based on your discretionary income and family size. If your annual income falls below a certain percentage of the poverty guideline for your state, you could qualify for a $0 monthly payment.

Can I lower my IDR payment?

Your loan servicer will calculate your IDR payment based on your discretionary income and family size. If you have a decrease in your income or increase in your family size, you could see your IDR payment go down. You’ll recertify your IDR plan annually with your most up-to-date information, but you can request an adjustment sooner.

Will income-based repayment go away?

There’s no sign that income-based repayment plans will go away. In fact, the Biden administration recently introduced the SAVE income-driven repayment plan, which offers a more generous payment calculation and interest subsidy than the income-driven repayment options.

Photo credit: iStock/JLco – Julia Amaral

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

If there’s an overpayment on your student loan refinance, the money might be returned to you or go towards your next payment on your new loan. Another possibility is that you may have to request a student loan overpayment refund.

These kinds of situations do occur, and they are typically resolved without too much effort. Here’s a closer look at student loan overpayment when you are refinancing your debt and what you can do to get your money back.

Student Loan Overpayment Explained

Student loan overpayment occurs when you pay off more than the amount you owe to your loan servicer. If you owe $1,000 on your loan and make a $1,500 payment, you’ve overpaid by $500.

This might happen for a couple of reasons.

•   For one, you might send an extra payment before your loan servicer has processed your previous one. It might take some time for your payments to reflect in your account. If you send an extra payment before the servicer has applied your last one, you could end up overpaying your balance.

•   Overpaying loans can also happen when you refinance student loans. When you refinance, your new loan provider will pay back your old balances. Specifically, it will send the amount that’s agreed upon when you sign the Truth in Lending (TIL) Disclosure, which is one of the documents you must sign to finalize your loan refinance.

If you make a payment on your old loans after you’ve signed the TIL Disclosure but before your new refinancing provider has disbursed the payment, the amount sent to your old servicer will exceed your balance. Your new lender will have paid off your old loan and then some, resulting in a student loan overpayment.

That’s not to say that you shouldn’t keep paying back your student loans while you’re waiting for refinancing to go through. In fact, it’s important to keep up with repayment so you don’t miss any due dates and end up with a negative mark on your credit report. Wait until your new refinanced student loan is up and running before you stop paying your old student loans.

💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

What Happens When a Student Loan Is Overpaid?

There are a few things that can happen when there’s an overpaid student loan. For one, a loan servicer might send the extra payment back to you via check or direct deposit.

If a refinancing provider overpaid your account, your old servicer might send the payment back to them. Then, that refinancing lender could send you back the payment or apply it toward your new, refinanced student loan.

Let’s say, for instance, that you decide to refinance your federal student loans with Alpha (a made-up company for the sake of this example). You understand that refinancing with a private student loan means you forfeit federal benefits and protections, and you know that if you refinance for an extended term, you may pay more interest over the life of the loan. If Alpha sends an overpayment to your existing loan servicers, those servicers will generally return the extra amount to Alpha. Then, Alpha will apply that overpayment retroactively to the principal balance on your new Alpha loan, a process that may take about six to eight weeks.

In some cases, your old servicer will send the payment back to you. For example, a lender might send a refund to the borrower directly if the overpaid amount is less than $500. In this case, the amount might be sent back to you via check using the address it has on file.

You can also receive a direct deposit, but you may need to request it specifically. Reach out to your loan servicer to find out how it deals with excess payments and any steps you need to take to receive your student loan refund.

💡 Quick Tip: If you have student loans with variable rates, you may want to consider refinancing to lock in a fixed rate before rates rise. But if you’re willing to take a risk to potentially save on interest — and will be able to pay off your student loans quickly — you might consider a variable rate.

What Should I Do With My Refund?

Finding out you overpaid your student loans can result in a windfall of cash. You may be wondering what to do with your student loan refund. Here are a few options worth considering.

Put Towards Next Payment

If you already used that payment toward your old loans, you might put it toward your new refinanced loan to pay down your balance faster (if your new servicer hasn’t already sent it there). After all, you’d already designated that cash for a student loan payment, so you may not miss having it in your bank account.

Making extra payments on your student loans can help you pay your student loan off early and save on interest charges. Let’s say, for example, that you owe $5,000 at a 7% interest rate with a five-year repayment term. If you make an extra payment of $500, you’ll get out of debt eight months sooner and save $292 in interest.

Use this tool for calculating student loan payments and finding out how much you can save by making extra payments. If you choose this route, instruct your loan servicer to apply the extra payment to your principal balance, rather than saving it for a future payment.

Use For Personal Expenses

Another option is putting that student loan refund toward personal expenses or your own savings. If you’re struggling to pay your rent or have other high-interest debt, for instance, covering those costs might be a priority over prepaying your student loans.

It’s also useful to have an emergency fund on hand that you can draw on if you lose your job or encounter unexpected expenses. Funneling that student loan refund into an emergency fund could save the day if you run into financial hardship.

However, using that refund on vacation or non-essential expenses might not be the best idea if you’re dealing with debt or don’t have an emergency fund in place. Consider your financial goals and priorities to determine the best use for that student loan refund.

The Takeaway

Overpaying student loans may be an inconvenience, but don’t worry about losing that money forever — you’ll get it back in the form of a refund or a payment toward your new, refinanced student loan. The exact process may vary by lender, so reach out to yours to find out what will happen next and whether there are any steps you must take to get your refund. Ensure that your loan servicers have your current address on hand, too, in case they need to mail you a check.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

What happens if you overpay a student loan?

If you overpay a student loan, your servicer will issue a refund. That refund may go to you or, in the case of refinancing, to the third-party servicer that issued the payment. The exact process may vary by lender, so get in touch with yours to find out where it will send your refund.

What happens to excess student loan money?

When you borrow a student loan, the lender usually sends the amount directly to your financial aid office, which applies it to required expenses like tuition and fees. It then sends any excess funds to you so you can use the money on books, supplies, living expenses, and other education-related costs. If you find you borrowed more than you need, you could consider returning the amount to your lender. If you return part of a federal student loan within 120 days of disbursement, you won’t have to pay any fees or interest on the amount.

Does refinancing affect student loan forgiveness?

Refinancing student loans can affect your eligibility for loan forgiveness. Most loan forgiveness programs are federal, and when you refinance federal loans with a private lender, you lose access to federal programs, such as Public Service Loan Forgiveness and Teacher Loan Forgiveness.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSL0322009

Student loan consolidation can streamline the federal student loans you’ve accumulated over the years. That can make it easier and possibly more affordable to pay down your debt. But this kind of consolidation can also have downsides, like being in debt longer and possibly paying more interest overall.

Currently, one-third of federal student loan debt is in the Direct Consolidation Loan program, according to EducationData.org. To understand your options, read on to take a closer look at the pros and cons of consolidating student loans and what options you may have. Equipped with this info, you can decide whether debt consolidation is the right next step for you.

What Is Student Loan Consolidation?

A Direct Consolidation Loan is a federal loan under the William D. Ford Direct Loan Program. Consolidation lets you combine one or more existing federal student loans into a new Direct Consolidation Loan. Here are some more details to note:

•   You don’t have to combine all of your federal loans; instead, you can select which eligible loan you’d like to consolidate. The consolidated loan balance is the total remaining principal from the loans you’ve chosen to merge, including any unpaid interest.

•   The loan will have a new interest rate and a longer repayment term. The loan servicer that’s managing your Direct Loan Consolidation repayment might change, too.

•   Most federal Direct Loans and Federal Family Education Loans (FFELs) can be consolidated.

•   Converting private student loans to federal loans through Direct Consolidation isn’t possible. Privately held education loans don’t qualify for this federal program.


💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

Pros of Consolidating Student Loans

Student loan consolidation presents a handful of advantages that help you take control over your repayment journey. Below are the top benefits of a Direct Consolidation Loan of your federal student loans.

Easier to Manage

Over your education, you might’ve opened new loan accounts for various academic years. These loans have different monthly payment amounts and due dates, and they are also likely maintained by different loan servicers.

At its forefront, consolidation simplifies your repayment experience by bundling multiple loans into one neat package. You’ll have one outstanding balance to focus on with just one payment due date to remember so there’s less chance of accidentally missing it (a plus for your credit). And if you have any questions about your loans, you only need to reach out to one servicer.

More Time to Pay Off Your Student Loans

Consolidating your student loans resets your repayment clock. Direct Consolidation Loan terms can be as long as 30 years if you choose a Standard or Graduated Repayment Plan. (Do note, however, that extending your loan term can mean paying more interest over the life of your loan.)

Your maximum timeline to pay back the consolidated loan also depends on your loan’s principal balance:

•   10-year term for amounts under $7,500

•   12-year term for $7,500 to $9,999

•   15-year term for $10,000 to $19,999

•   20-year term for $20,000 to $39,999

•   25-year term for $40,000 to $59,999

•   30-year term for $60,000 or greater

If you need more runway to pay down your federal student debt, a consolidation loan might be an option.

Can Have a Lower Monthly Payment?

Thanks to the extended repayment term that a Direct Consolidation Loan offers, you’re left with a lower monthly payment. The loan’s repayment is stretched over a longer period so your fixed installments are much smaller than you originally had. (As mentioned above, though, you may pay more in interest over the repayment term if you extend it.)

For example, let’s say you’re combining two loans:

•   Loan 1 is $15,000 at 6%

•   Loan 2 is $30,000 at 6.4%

Your original monthly payment for loans 1 and 2 are $166.53, and $339.12, respectively. That’s $505.65 per month in student loan payments.

If you consolidate both loans your principal balance is $45,000. Over a 25-year term at 6.25%, your monthly payment is $296.85 — that’s more than $200 less each month.

Unlocks Income-Contingent Repayment for Parents

If you have a qualifying federal student loan, enrolling in one of four income-driven repayment (IDR) plans can help you access lucrative federal benefits, like Public Service Loan Forgiveness (PSLF). However, Direct PLUS Loans for parents aren’t eligible for IDR.

A consolidation loan gives borrowers with Direct Parent PLUS Loans a way into one IDR plan, the Income-Contingent Repayment (ICR) Plan. After consolidating Parent PLUS Loans, parents can repay the new loan under ICR over 25 years.

The ICR Plan calculates monthly payments either at 20 percent of your discretionary income, or the equivalent of an (income-adjusted) fixed payment over a 12-year period — whichever is lower.

You Can Choose a Federal Loan Servicer

When you have a federal student loan disbursed to you, the account is automatically assigned to a loan servicer. You don’t get a choice in which entity services your loan. Subsequent loans are also automatically assigned to a servicer and not necessarily the same one.

When applying for a Direct Consolidation Loan, you get to choose which loan servicer you prefer. If you’ve had a bad experience dealing with a servicer in the past, consolidation gives you the power to choose a servicer that might be a better fit. It’s currently the only way to switch your loan servicer within the federal system.

Recommended: Student Loan Refinance Guide

Cons of Consolidating Student Loans

Although student loan consolidation offers notable benefits, it also presents a number of potential downsides. Here are a few disadvantages to consider.

Unpaid Interest From Existing Loans, Capitalizes

An easily overlooked downside of loan consolidation involves unpaid interest. If you have unpaid interest on any of the loans you’re combining, the interest is added to your principal balance. This is called interest capitalization.

This means that your new consolidation loan will have a higher principal balance. And moving forward, you’ll pay interest on this higher balance. This could result in paying more for your student debt overall.

You Might Be in Debt Longer

You might be positioning yourself to stay in debt longer than your original repayment timeline. Although a longer term is helpful for lowering monthly payments, it can take a toll on you in other ways.

•   Being in debt longer can take a toll on your mental health. A 2023 study of 331 college graduates found that having high debt was tied to anxiety, depression, and problematic substance abuse.

•   Additionally, being in debt longer might result in delaying other life and financial goals, like buying a first home, starting a family, or saving money for retirement.

Longer Repayment Means More Interest

Another long-term negative effect of loan consolidation is that it can result in paying more interest over time. Although a longer term results in smaller installment payments, it means you’re delaying paying off your debt.

This delay comes at a cost in the form of interest charges. The more interest you pay toward your loan, the more your total borrowing cost.

Losing Federal Loan Benefits

Consolidating your federal student loans might result in lost borrower benefits. Some benefits at stake are interest rate discounts and principal rebates.

A Direct Consolidation Loan also typically resets any payment credit you’ve earned toward federal loan forgiveness under PSLF or an IDR plan. Past qualifying payments that were made before you consolidated won’t count toward the payment requirement for forgiveness. This can ultimately push back your loan forgiveness eligibility.

A one-time IDR account adjustment is in effect through December 31, 2023. If you consolidate your loans before January 1, 2024, qualifying IDR payments will still count toward loan forgiveness. After the adjustment deadline, however, you’ll lose this valuable payment credit.

(Worth noting: If you consolidate your federal student loans with a private loan, you forfeit federal benefits and protections. You’ll learn more about this option below.)

The Application Process Takes Time

How long it takes to consolidate student loans can also be an issue if you’re in a time crunch. Although filling out the application takes an estimated 30 or less, the process overall takes longer. Depending on your unique student loan situation, it can take anywhere from four to six weeks to complete the consolidation process.

Weighing the Pros and Cons for Yourself

Now you’ve learned what are the pros and cons of student loan consolidation when it comes to federal funds. There’s a lot to mull over if you’re entertaining the idea of consolidating student loans. Pros and cons (and how you prioritize them) might shift depending on your overall repayment strategy.

•   For example, consolidating your loans might make sense if you simply want to declutter your loan accounts or need a lower monthly payment. It might also make sense if your current loan type doesn’t qualify for loan forgiveness or an IDR plan, and consolidation is your only way forward.

•   However, consolidation might not be for you if you’re not working toward loan forgiveness and want to pay the least amount of money toward your education in the shortest time.

Alternatives to Student Loan Consolidation

Sometimes, consolidating student loans isn’t the best approach depending on your situation. If you’re on the fence about pursuing a Direct Consolidation Loan, here are a few other alternatives.

Income-Driven Repayment Plan

If your student loan payment is too difficult to manage and you won’t be able to afford it for the foreseeable future, ask your servicer about an income-driven repayment plan.

IDR plans calculate your monthly payment using your income and family size information. Payments are restricted to a small percentage of your discretionary income, and all plans have a longer-than-standard repayment period.

Most borrowers have four types of IDR plans to choose from:

•   Saving on a Valuable Education (SAVE). Payments are typically 10% of your discretionary income. Its term is 20 years if all your loans are for undergraduate study or 25 years if you’re repaying any graduate-level loans under the plan. This SAVE Plan replaces the REPAYE program.

•   Pay As You Earn (PAYE). Payments are generally 10% of your discretionary income over a 20-year term.

•   Income-Based Repayment (IBR). Your payment is 10% or 15%, over a 20- or 25-year term, depending on when you got the loan.

•   Income-Contingent Repayment (ICR). Over a 25-year term, you’ll pay the lesser of 20% of your discretionary income or the income-adjusted fixed payment you’d pay across 12 years.

Additionally, if you still have a loan balance after completing the plan term, the remainder is forgiven. However, the forgiven balance might be considered taxable income on your federal return.

Deferment or Forbearance

If you can’t manage your current student loan payment due to a temporary financial situation, consider deferment or forbearance.

These relief options are a short-term solution that lets you pause your required federal loan payments until your finances stabilize.

Typically, interest still accrues while you’re in student loan forbearance, and certain loans still accrue interest in deferment. Additionally, the months you’re in deferment or forbearance might not be credited toward loan forgiveness.

Student Loan Refinance

If you have loans that aren’t eligible for consolidation or you have strong credit and aren’t pursuing other federal benefits, refinancing student loans with a private loan is another alternative.

Student loan refinancing is offered by private lenders. You can refinance federal and existing private student loans during this process. The refinancing lender pays off your existing student loan balances and creates a new refinance loan in their place.

The new loan will have a new loan agreement, interest rate, and term. The repayment plans you can access will depend on your lender. Always check your rate with a handful of lenders to find an offer that fits your needs. A student loan refinancing calculator can help you see whether refinancing can save you money.

Keep in mind that refinancing federal loans results in losing access to federal benefits and programs. Learn more about the differences between private and federal student loans before changing your repayment strategy.

The Takeaway

Consolidation can be a useful strategy for some borrowers, but it’s not necessarily for everyone. Take stock of your short- and long-term repayment goals and how the pros and cons of consolidating federal student loans affect them. For instance, a lower monthly payment could be the right choice for one person, but the fact that you might be paying more interest for an extended term could be a no-go for someone else.

If a Direct Consolidation Loan isn’t right for you, explore other repayment paths, including refinancing student loans.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Can student loan consolidation affect your credit score?

Consolidating student loans can affect your credit in indirect ways. For example, payment history is the biggest factor for your FICO® score. Securing a manageable monthly payment via consolidation might help you avoid being late or missing a loan payment. These consistent payments by your due date can build your credit over time.

Can consolidated student loans be forgiven?

Yes, Direct Consolidation Loans are an eligible loan type for federal student loan forgiveness programs. Consolidated loans can be included if you’re earning forgiveness through programs, like Public Service Loan Forgiveness and through an income-driven repayment plan.

Does consolidating student loans lower interest rates?

No. Your Direct Consolidation interest rate is calculated based on the weighted average of the rates on your consolidated loans. This average is then rounded up to the closest one-eighth of a percent, and there’s no rate cap in place.

Photo credit: iStock/Jovanmandic

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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The federal Direct Consolidation Loan program can help you manage your federal student loans. However, it also means a new loan account turns up on your credit report. You may be concerned about whether consolidating student loans in this way has a positive or negative impact on your credit. The short answer is that it can indirectly do both, but to varying degrees.

To help you understand exactly how your credit could change, read on. You’ll learn the ins and outs, so you can decide whether consolidating your student loans is the right financial move to make.

Can Student Loan Consolidation Have a Positive Impact on Your Credit Score?

If you are considering ways to better wrangle your debt, you may wonder, “Does consolidating student loans help my credit?”

Good question. Your borrowing activity and repayment habits do impact your credit score. One of the biggest — yet indirect — effects that consolidation has on your credit score is making your payments simpler. Consider these points:

•   Thirty-five percent of your FICO® score is based on your payment history. Making consistent and full monthly payments has the most dramatic impact on your credit score on a day-to-day basis.

•   However, your student debt is likely spread across multiple loans taken out during your years of education. Each of these loans has its own payment amount and due date, making it difficult to manage.

•   A Direct Consolidation Loan can cut through the clutter. It streamlines your repayment experience, which may mean you are less likely to miss a due date or forget a payment altogether. It can set you up for a positive payment history, which is an indirect way that you can see a credit score increase after student loan consolidation.

•   Incidentally, unlike private refinance loans, it will not involve a hard credit inquiry, which usually lowers your credit score a bit for a short period of time.

💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Can Student Loan Consolidation Hurt Your Credit Score?

Consolidating student loans can affect your credit score in a negative way, too. Can consolidating student loan debt hurt your credit score? To some extent, it might.

Here’s a closer look:

•   Fifteen percent of your FICO credit score calculation looks at the length of your credit history. It considers the age of your oldest credit account, like the first student loan you borrowed during your freshman year of school, and the age of your newest account. It also determines the average age of all of your open accounts.

•   Having open accounts that you’re actively repaying helps you build credit over time. Consolidating your original student loans effectively closes those older accounts.

•   This altered length of credit history could result in a less favorable treatment for your score. The impact on your score, however, is lessened over time as you make timely payments toward your consolidated loan.

Federal vs Private Student Loan Consolidation and Credit Score

Federal Direct Consolidation is exclusively a repayment option offered by the US Department of Education. This process doesn’t require a credit check, as noted above, and most federal loans can be consolidated.

In terms of private student loans, they are ineligible for Direct Loan consolidation. However, you can refinance existing federal student loans or private loans with a private lender. Understand these points:

•   If you decide to refinance student loans with a private lender, the process is similar to Direct Loan Consolidation in that it combines existing education loans into one. You can do this both as undergraduate and graduate school loan refinancing.

•   The newly refinanced loan is considered private student debt. It may be for a lower rate than you previously had, or it could offer a lower monthly payment for a longer term. (Note that when you refinance with an extended term, you may pay more interest over the life of the loan.)

•   The refinance lender pays off the student loans you’ve chosen to include and creates a new refinance loan. You’ll repay the refinance lender for the total balance of the combined loan, but at a new rate and repayment terms.

•   It’s important to recognize that when you refinance federal loans as private loans, they will no longer qualify for federal benefits and protection programs, such as deferment and forbearance. For these reasons, it’s wise to carefully consider whether refinancing federal loans is the right option for you.

Alternatives to Student Loan Consolidation

If, after weighing the pros and cons of student loan consolidation, you find it’s not for you, there are other repayment options available.

Income-Driven Repayment

One advantage of a Direct Consolidation Loan is it lets you make smaller monthly installments over a longer term. If, however, you can’t make your monthly federal loan payments for the foreseeable future, ask your servicer about income-driven repayment (IDR).

IDR offers repayment terms of 20 or 25 years, depending on the plan you’re on. Your income, family size, and chosen IDR plan determine what your reduced monthly payment is. For some eligible borrowers, your monthly payment could be as low as $0.

Additionally, if you still have a remaining balance after completing your IDR plan, the balance might qualify for loan forgiveness.

Federal Deferment or Forbearance

If you’re experiencing short-term financial hardship, you might be able to delay your federal student loan payments temporarily. The Department of Education offers deferment and forbearance programs that let you pause your payments without the loan going into default.

Keep in mind that while loans are in deferment, interest might accrue on certain federal loans. If you’ve requested forbearance, interest is charged during this period, regardless of the federal loan you have.

Student Loan Refinancing

Private student loans, mentioned above, aren’t eligible for the two alternatives just described. However, they may be a good solution in some situations. For instance, they might be a helpful option if you have private student loans that you are struggling to pay or have federal student loans and don’t have plans to take advantage of federal benefits (remember, you’ll forfeit those plus other protections).

Since private student loan refinancing requires a credit check, it’s best for borrowers with good credit. A student loan refinance might help you secure a lower interest rate or a lower monthly payment at a different repayment term. Private lenders have their own eligibility requirements, rates, and refinancing offers.

Shop around and try a student loan refinancing calculator to compare your offers and see if refinancing makes sense for you.

The Takeaway

Consolidating your federal loans has little direct effect on your score over the long term. Its effect on your age of credit accounts might temporarily lower your score. However, if consolidating means securing a lower, more manageable payment or unlocking federal benefits, the impact on your credit might be worth it.

However, if your main concern is getting relief from high monthly student loan payments, speak to your loan servicer or lender ASAP to see if your loans qualify for other repayment options. In some cases, refinancing with a private lender may be a good decision.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Can consolidating student loans directly raise your credit score?

No, consolidating your student loans doesn’t directly raise your credit score. It can simplify your monthly payments and possibly reduce your payment amount (though possibly extending your term and charging more interest over the life of the loan). These factors can help you maintain on-time payments, which can help build your score.

Can consolidating student loans directly lower your credit score?

Does student loan consolidation hurt your credit? It might temporarily lower your score: Loan consolidation can add a new open account to your credit record while closing an older one, which negatively affects your average length of credit history. Also, a new private loan can involve a hard credit inquiry, which can temporarily reduce your number.

Are there any indirect effects of student loan refinancing on your credit score?

Yes. Private student loan refinancing requires a hard credit check. This credit inquiry can temporarily lower your score by a few points for a short period of time. Additionally, refinancing might affect your average age of credit accounts and other factors that contribute to your credit score.

Photo credit: iStock/Ridofranz

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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