Student loan consolidation — or more specifically, a federal Direct Consolidation Loan — allows federal student loan holders to combine their federal loans into one new loan. In some ways, this process could potentially make your repayment more manageable, but there are also some adverse effects that could make it not worth the trouble.
If you’re considering consolidating your federal student loans, this guide will help you understand both the benefits and the drawbacks and how to complete the process.
What to know before you consolidate your student loans
Student loan consolidation is a process offered by the U.S. Department of Education that allows borrowers to replace all of their federal loans with one new loan under the Direct Loan program.
Depending on your situation, consolidating can be a good thing, helping you to:
- Simplify your repayment by combining multiple monthly payments into one.
- Switch to a different loan servicer if you’ve had problems with your current one.
- Qualify for certain benefits, such as income-driven repayment plans and loan forgiveness, that you can’t access under your current loan program.
- Extend your repayment term to up to 30 years.
- Get your loan out of default.
Although those benefits sound appealing, there are some potential drawbacks you could run into, including:
- Your new interest rate will be the weighted average of your current loan rates rounded up to the nearest one-eighth of a percent.
- If you’re working toward Public Service Loan Forgiveness (PSLF), consolidation resets the clock on the monthly payment requirement.
- Consolidation can be used to lengthen your repayment term, which means you’ll pay more in interest over the life of the new loan.
- You may lose specific benefits you get through your current loan program that isn’t offered by the Direct Loan program.
- Private student loans are not eligible for consolidation. You can only consolidate your federal student loans.
As you consider whether student loan consolidation is right for you, consider both the advantages and disadvantages and how they apply to your specific situation. Also, note that student loan consolidation is different than student loan refinancing.
With a refinance loan, you replace either federal or private student loans (or both together) with one new loan with a private lender. Student loan consolidation, on the other hand, is available only for federal loan holders and the new loan is originated through the Department of Education.
How to consolidate student loans in 6 steps
Learning how to consolidate student loans is essential to making sure the process goes smoothly and that it’s the right step for you. Here are some steps you can take from start to finish.
1. Consider your reasons for consolidating
Student loan consolidation can have both a positive and negative effect on your repayment plan. Student loan consolidation rates, for instance, are slightly higher than the weighted average of what you’re currently paying, so the process won’t save you money in that way.
However, if you’re planning to work toward loan forgiveness or you’re struggling to get by with your current payments, gaining access to PSLF and income-driven repayment plans you couldn’t use before could make a big difference in your financial life.
Before you start the application process, consider all of the benefits and drawbacks of consolidating. Also, think about whether refinancing with a private lender, which may offer a lower interest rate, may be a better option for your needs.
2. Fill out an application
If consolidation is right for you, the next step is to fill out an application through StudentLoans.gov. The process typically takes less than a half hour but needs to be completed in one session. You’ll need several things to fill it out, including:
- Your Federal Student Aid ID (if you don’t have one, you can create one).
- Personal information, including your address, email address, phone number and the best time to reach you.
- Financial information, which can vary based on what type of repayment plan you want.
Check out the —What do I need?” section on the application site to make sure you have everything before you begin the application process. There is no charge for consolidating through the Department of Education.
3. Pick a loan servicer
The student loan consolidation process allows you to pick your new loan servicer, which can be a nice perk if you’ve had bad experiences with your current one.
Before you choose one, though, get to know your options. While it’s likely that no servicer is perfect, doing a little research can help you pick the one with the best overall customer experience.
4. Decide which loans to consolidate
You’re not required to combine all of your federal loans into one. In fact, it may be beneficial not to consolidate some if they have a much lower or higher interest rate than the others because it could allow you to focus extra payments on higher-interest loans and pay them off more quickly, saving you money on interest.
You can also consolidate just one loan, which may be a good idea if it’s not a Direct Loan and you want access to certain benefits the Direct Loan program provides.
Think carefully about which loans you want to consolidate and whether you want to leave some loans out. There’s no right answer to this question, so it’s important to know your situation and your needs. But note, you cannot consolidate any private student loans into this consolidation.
5. Choose a repayment plan
When consolidating your student loans, you’ll have the option to choose from several repayment plans, including graduated and extended plans, as well as income-driven repayment plans that calculate your monthly payment based on a percentage of your discretionary income.
If you pick an income-driven repayment plan, you’ll need to fill out another form to request it. Not all repayment plans are available to all student loan borrowers, so you may need to provide income documents to show financial need.
6. Keep making payments
Once you’ve read the terms and conditions of your new loan and accepted them, keep making your monthly payments until you’ve received confirmation that the consolidation has taken place. If you accidentally miss a payment during the process, it could hurt your credit.
The only exception to this is if your current loans are in a deferment, forbearance or grace period.
Should I consolidate my student loans?
Now that you know how to consolidate student loans, it’s important to take the time to research your options and make sure it’s the right decision for you. If you’re after one or more of the benefits consolidation offers, it might be the best choice.
But if the drawbacks outweigh the benefits for you or you’re looking for a way to lower your interest rate, refinancing through a private lender may be worth considering. Use Purefy’s rate comparison tool to get an idea of what interest rates you may qualify for based on your creditworthiness, and compare multiple lenders in one place. Also, all lenders on Purefy.com allow the refinancing of both private and federal student loans during the refinance process.
Whatever you decide, it’s best to have a plan to work on repaying your student loans as quickly as possible to save you both time and money.