Student loan consolidation can streamline the multiple federal student loans you’ve accumulated over the years. That can make it easier and possibly more affordable to pay down your debt. But consolidation can also have downsides, like being in debt longer and potentially paying more interest overall.
Currently, almost 32% of federal student loan debt is in the Direct Consolidation Loan program, according to the Education Data Initiative. To understand your options, read on to learn about the pros and cons of consolidating student loans and what options you may have.
Table of Contents
Key Points
• Consolidating federal student loans simplifies repayment by combining multiple loans into one loan with a single payment date and one loan servicer.
• Extended repayment terms for Federal Direct Consolidation Loans creates lower monthly payments but can result in more interest paid over the life of the loan.
• Unpaid interest on loans gets capitalized during consolidation for a higher principal balance, and with interest owed on the new higher balance.
• Consolidation resets qualifying payment credit toward Public Service Loan Forgiveness and income-driven repayment plans, pushing back forgiveness timelines.
• Refinancing student loans replaces old loans with a new loan that may have a lower interest rate for those who qualify, however, refinancing federal loans makes them ineligible for federal benefits.
What Is Student Loan Consolidation?
A Direct Consolidation Loan is a federal loan that lets you combine one or more existing federal student loans into one new loan. Here are some details about how student loan consolidation works:
• You don’t have to combine all of your federal loans; instead, you can select which eligible loans 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 for your Direct Loan Consolidation loan might change, too.
• It’s not possible to convert private student loans to federal loans through Direct Consolidation. Private education loans don’t qualify for this (or any other) federal loan program.
Which Loans Qualify for Federal Direct Consolidation?
Many different types of federal student loans are eligible for federal consolidation. The loans that can be consolidated include:
• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS Loans (for graduates and parents)
• Federal Family Education Loan (FFEL) Program Loans
• Federal Perkins Loans
Direct PLUS loans received by parents (often called Parent PLUS loans) cannot be consolidated together with federal loans received by a student. And, as noted above, private student loans are not eligible for federal consolidation.
How Direct Consolidation Interest Rates Are Set
The interest rates on Direct Consolidation loans are calculated based on the weighted average of the rates on the loans being consolidated. That average is then rounded up to the nearest one-eighth of a percent. Consolidation does not typically lower a borrower’s interest rate.
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Pros of Consolidating Student Loans
There are pros and cons of consolidating student loans. On the plus side, student loan consolidation has some advantages that could be helpful as you’re repaying your federal loans. These are some of the benefits of consolidation.
Easier to Manage
Over the course of your education, you may have taken out new loans for various academic years. That means you have a number of different monthly payment amounts and due dates, as well as different loan servicers.
Consolidation simplifies your repayment experience by bundling multiple loans into one neat package. You’ll have just one outstanding balance to focus on with only one payment due date to remember, so there’s less chance of accidentally missing it. And if you have any questions about your loans, you only need to reach out to one loan servicer.
More Time to Pay Off Your Student Loans
Consolidating your student loans resets your repayment clock. Direct Consolidation Loan terms can range from 10 to 30 years on the Standard or Graduated Repayment Plans. (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 time to pay down your federal student debt, a consolidation loan might be an option.
May Have a Lower Monthly Payment
Because of the extended repayment term that a Direct Consolidation Loan offers, you end up with a lower monthly payment. The loan’s repayment is stretched over a longer period so your fixed installments are typically smaller than the payments you originally had. (As mentioned above, though, you will 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 6.00%
• Loan 2 is $30,000 at 6.40%
Your original monthly payments for loans 1 and 2 are $166.53 and $339.12, respectively, over a 10-year term. 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 $208.80 less each month.
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, however, you get to choose which loan servicer you prefer. If you’ve had a negative experience dealing with a servicer in the past, consolidation gives you the power to choose a servicer that might be a better fit.
Cons of Consolidating Student Loans
Student loan consolidation also has a number of potential downsides, however. Here are some of the disadvantages to consider.
Unpaid Interest From Existing Loans Capitalizes
One drawback 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, which could result in paying more for your student debt overall.
You Might Be in Debt Longer
You may 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 in other ways:
• Being in debt longer can impact your mental health. A 2024 study of student loan borrowers found that having student loan debt was tied to anxiety, depression, and feelings of hopelessness.
• Additionally, being in debt longer can be a significant drain on your finances and might result in delaying other life and financial goals, like buying a home, starting a family, and saving money for retirement.
Longer Repayment Means More Interest
Another downside of loan consolidation is that it can result in paying more interest over time. Although a longer loan term results in smaller installment payments, it means you’re stretching out the amount of time it takes to pay off your debt.
The extra years’ worth of debt comes at a cost in the form of interest charges. The more interest you pay toward your loan, the more you pay for the loan overall.
Losing Federal Loan Benefits
A Direct Consolidation Loan typically resets any payment credit you’ve earned toward federal loan forgiveness under Public Service Loan Forgiveness (PSLF) or an Income-Driven Repayment (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 timeline.
Also, if you consolidate your federal student loans with a private loan, you forfeit federal benefits and protections. (Read more about this below.)
Application Process Takes Time
How long it takes to consolidate student loans could be an issue if you’re in a time crunch. Although filling out the application takes an estimated 30 minutes 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.
Here’s a side-by-side comparison of the student loan consolidation pros and cons.
| Pros of Consolidation | Cons of Consolidation |
|---|---|
| Bundles multiple loans into one | Prior unpaid interest added to loan principal |
| Simplifies repayment | May stay in debt longer |
| Extends the term of the loan | Might result in paying more interest |
| May lower monthly payments | Lose access to some federal benefits |
| Allows you to choose your loan servicer | Process may take weeks to complete |
Student Loan Consolidation vs Student Loan Refinancing
Student loan consolidation and student loan refinancing share some similarities, but they are two distinctly different processes. Although they both allow borrowers to combine multiple student loans into one, other than that, they function in very different ways.
Key Differences Between Consolidation and Refinancing
For starters, federal student loan consolidation is only available for federal student loans. Both private student loans and federal student loans are eligible for refinancing with a private lender.
Other major differences between consolidation and refinancing include:
• Credit check: Student loan consolidation does not involve a credit check; with refinancing, a credit check is required for approval.
• Interest rates: When you refinance, the interest rate you get depends upon the strength of your credit (or the credit of your student loan refinancing cosigner, if you have one). If your credit is strong, you may get a loan with a lower interest rate. With consolidation, your interest rate is a weighted average of the rates of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. Consolidation doesn’t result in a lower interest rate.
• Access to federal benefits: When you refinance federal loans, they become private loans and you lose access to federal benefits and protections, such as income-driven repayment and forgiveness. With student loan consolidation, you retain access to these federal benefits.
• Loan terms: The repayment term for consolidation loans is 10 to 30 years. Refinancing loan terms vary by lender, but may range from approximately 5 to 20 years.
When Refinancing Might Make More Sense
Refinancing may make more sense for a borrower who has private student loans and strong credit and is looking to lower their interest rate. This can reduce their monthly payments and total loan cost.
Student loan refinancing may also make sense for a borrower whose credit situation has strengthened since they first took out their student loans. In this case, they may be able to qualify for lower student loan refinancing rates, which could save them money.
Recommended: Student Loan Refinance Guide
Weighing the Pros and Cons for Yourself
There’s a lot to mull over if you’re considering the idea of consolidating student loans. Student loan consolidation 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 simplify and streamline your loan accounts or you 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.
Questions to Ask Before You Consolidate
If you’re considering consolidation, the following questions could help you determine whether it’s the right path for you. Ask yourself:
• Do I have outstanding interest on my loans that will capitalize? Any unpaid interest on loans being consolidated will be added to the principal balance of the consolidation loan and may result in paying more for the loan overall.
• Will the new consolidation loan term mean I end up paying more total interest over the life of the loan? An extended repayment term on a consolidation loan lowers monthly payments, but it also means paying more in interest. Additionally, you’ll be in debt longer.
• Will consolidating affect student loan forgiveness? If you are pursuing forgiveness through PSLF or the IBR plan, any qualifying payments you made before consolidation will not count toward the payment requirement for forgiveness.
Alternatives to Student Loan Consolidation
Consolidating student loans isn’t always 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 Plans
Borrowers who are struggling to make their student loan payments may want to consider an income-driven repayment plan.
IDR plans calculate your monthly payments based on your discretionary income and family size. Because repayment is stretched over 20 or 25 years, your monthly payments may be lower.
Currently, borrowers have three IDR plans to choose from:
• 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 took out the loan. On IBR, if you still have a loan balance at the end of the repayment term, the remainder is forgiven.
• 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.
Be aware that for loans disbursed on or after July 1, 2026, there will be just one income-based plan available. The Repayment Assistance Plan (RAP) is a new income-driven plan that bases payments on a borrower’s adjusted gross income. The unpaid interest each month is canceled, and after 30 years, any remaining balance is forgiven.
Borrowers with existing student loans (meaning those taken out before July 1, 2026) can stay in their current IDR plan for now, but must switch to IBR or RAP by July 1, 2028.
Deferment or Forbearance
If you can’t manage your current student loan payment due to a temporary financial hardship, you may want to consider deferment or forbearance. These are temporary options that let you pause or reduce 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 private student loans or loans that are not eligible for consolidation, or you have strong credit and aren’t pursuing federal benefits, refinancing student loans is another alternative.
Student loan refinancing involves replacing your existing loans with a new loan from a private lender. The new loan will have a new loan agreement, interest rate, and term. Ideally, if you have strong credit, the interest rate on the refinance loan would be lower. A student loan refinancing calculator can help you see whether refinancing can save you money.
Just remember that refinancing federal loans results in losing access to federal benefits and programs. It can be helpful to 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 for everyone. Those considering consolidation can take stock of their short- and long-term repayment goals and how the pros and cons of consolidating federal student loans might affect them. For instance, a lower monthly payment could be the right choice for one person, but paying more interest for an extended term could be a no-go for someone else.
If a Direct Consolidation Loan isn’t right, there are other paths to explore, including income-driven repayment plans, deferment or forbearance, and 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. Consistent payments made by your due date can positively impact 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 or an Income-Based Repayment (IBR) plan.
Does consolidating student loans lower interest rates?
Generally speaking, 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.
Should you consolidate before applying for PSLF?
It typically only makes sense to consolidate before applying for PSLF if you have loans other than Direct Loans (such as FFEL, Perkins, or Parent PLUS Loans). These loans are not eligible for PSLF unless they are consolidated.
Is it worth consolidating if you’re already on an IDR plan?
No. Consolidating loans if you’re already on an IDR plan means that any qualifying payments you made before the consolidation will not count toward the total payment requirement for forgiveness. Consolidating resets your qualifying payment count to zero, meaning you’ll have to start all over again.
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