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.
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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.
| Pros of Consolidation | Cons of Consolidation |
|---|---|
| Simpler repayment experience | Prior unpaid interest added to principal |
| Extends your term | Keeps you in student debt longer |
| Lowers installment payments | Might pay more interest |
| ICR access for parent PLUS borrowers | Lost access to some federal benefits |
| Lets you choose your servicer | Process isn’t instant |
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.
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