What to Know About Student Loan Consolidation

Weigh the pros and cons of this method before you take the leap

an approved debt consolidation loan application lays under a calculator, pen, and eyeglasses

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If you’ve been searching for student debt repayment strategies you might have heard about student loan consolidation. While this method has helped some people successfully repay their student debt, it’s important to consider both the pros and cons before you jump into it. Here’s everything you need to know about student loan consolidation, including how to get started with it if you choose that path.

What Is Student Loan Consolidation?

If you have more than one federal student loan and are looking for a simpler way to organize your repayment strategy, you may be able to combine your loans with a direct consolidation loan. You’ll receive a new loan that totals the balance of your old loans. The new interest rate is determined using a weighted average of your original loans. You repay your old loans with this money and then have the one, new loan to pay.

Student loan consolidation isn’t the same thing as refinancing. When you refinance, you also receive a new loan to repay your debt, but from a private lender instead of the government. You could potentially receive a lower interest rate with this new loan, but moving forward you would not longer qualify for federal income-driven repayment plans or student loan forgiveness.

Most federal student loans can be consolidated, but you can’t consolidate private student loans, state student loans or Direct PLUS loans received by a parent.

Student loan consolidation could work well in some scenarios. It could be to your advantage to consolidate your student loans if:

  • You want a fixed interest rate. Since direct consolidation loans offer a fixed interest rate, your payment will stay the same for your entire loan. This could be to your advantage if your current federal student loans have variable interest rates that change with the market.
  • You need lower monthly payments. With a direct consolidation loan you can extend the term of your loan, thereby lowering your monthly payments. This will likely mean that you pay more in interest over the lifetime of your loan, but it could help you do a better job of balancing your monthly budget.
  • You’d find it easier having one monthly payment. If you’re having a hard time staying organized with your payments and think you’d do better simplifying your finances in this way, consolidating your loans could help you stay on track.

Disadvantages of Student Loan Consolidation

Getting a federal direct consolidation loan isn’t always in your best interest. It might not be the right solution for you in these cases:

  • You want to use the debt avalanche method for quicker repayment. Many people choose to focus on repaying their loans with the highest interest rate first, to save money in the long run. Since your interest rate with a federal direct consolidation loan is a weighted average of all your loans, you won’t be able to do this if you consolidate.
  • You’d lose federal repayment benefits. In some cases, consolidating your student loans could mean you’ll miss out on rebates or cancellation benefits tied to your original loans. If you’ve been paying toward income-driven repayment or PSLF, when you consolidate your loans you’ll lose credit you’ve accrued toward this.
  • You don’t want to extend the lifetime of your loan. Consolidating could lower your monthly payments, but extending the term of your loan will mean you pay more in interest over time.

How to Get Started Consolidating Your Student Loans

If you do decide to move forward with consolidating your student loans, here’s how the process works.

Step 1: Apply for a direct consolidation loan

You can start the process by applying online at StudentLoans.gov. There is no fee to get started and the initial application should take you about 30 minutes to complete. Make sure you have your verified FSA ID and loan documents from your servicer on hand to complete the application.

Watch out for services that charge a fee for consolidating your federal student loans. The process is free to do on your own.

Step 2: Verify the loans you want to consolidate

Once your consolidation servicer has reviewed your application, it will reach out to you with next steps. At that time you’ll confirm which loans you want to consolidate and agree to the terms of your new loan.

Step 3: Continue payments on your old loans until the process is complete

Your consolidation servicer will let you know when your direct consolidation loan has paid for your original loans. Until that time, keep making payments on your current loans unless you are in a grace period or your loans are in a deferment or in forbearance.