If you’re one of the millions of Americans who’ve graduated with student loan debt, you’re likely making multiple loan payments. Each year you borrow for school requires taking out a separate loan. And while all the money behind federal student loans comes from the federal government, the government doesn’t directly communicate with borrowers. It assigns one of many servicers to manage student loans, billing, and payments. So if you have more than one loan, that could mean more than one servicer, which means multiple bills.
It’s easy to feel overwhelmed trying to manage so many monthly payments. That’s where student loan consolidation comes in.
About Federal Student Loan Consolidation
In essence, consolidation means combining all your current loans into a single loan. The government issues a single direct consolidation loan in the total amount of your original loans. The new consolidation loan pays off the original loans, leaving you with only the consolidation loan amount to repay. That means one monthly payment with one servicer. The new monthly payment will be roughly the same as the combined total of all the old payments unless you opt to lengthen the repayment term.
In addition to simplifying your payments with a single monthly bill, you also get the option to stick with the standard 10-year repayment schedule or extend your repayment term up to 30 years. How long you can extend the repayment term depends on the repayment plan you select on your consolidation application.
The repayment options for federal student loans that apply to consolidation loans include:
- Extended Repayment. The extended repayment plan allows you to repay your loans over up to 25 years to lower the monthly payment amount. But remember, you’ll pay back more overall because you’re accruing greater interest over a longer repayment term. You can choose to keep the monthly payment fixed for the whole 25 years or graduated, with payment amounts starting lower and gradually rising every few years. To qualify for the extended repayment plan, you must have no outstanding balance on any loan borrowed before Oct. 7, 1998, and have a balance over $30,000 on the Federal Family Education Loan Program or on federal direct loans.
- Graduated Repayment. The graduated repayment plan allows you to start with a lower monthly bill that increases over time. You can opt to repay up to 30 years, depending on how much you owe. Check the chart for allowable time frames, depending on your amount of debt. Payments increase every two years and will never be less than the amount of monthly interest that accrues nor greater than three times the amount of any other payment.
- Income-Driven Repayment. There are four income-driven repayment (IDR) plans, and each has its own set of advantages and disadvantages. But essentially, each of them ties your monthly payment to your income, capping it at a certain percentage of what the government considers discretionary income based on the federal poverty guidelines for your state of residence and a family of your size. Qualifications vary by plan, as does the length of time you’ll be required to repay before any remaining debt qualifies for student loan forgiveness. But you don’t have to worry too much about which plan is the best for you. When you apply for IDR, your loan servicer puts you on the lowest-monthly-payment plan you’re eligible for unless you request otherwise. Note that you must fill out a separate application for IDR.
Regardless of which plan you select, repayment generally begins within 60 days of when your new consolidation loan is disbursed (paid out).
Calculating the New Interest Rate
Federal law determines the interest rates on student loans, and they vary depending on the type of loan and year it was disbursed. As a result, multiple loans mean multiple interest rates. When you combine all your loans into one, you’re issued a single new rate. This rate is fixed for the life of the loan and calculated as the “weighted average” of all the loans you’re consolidating rounded up to the nearest one-eighth of 1%.
A weighted average means that instead of adding all the interest rates and dividing by the total number of loans, the interest rates owed on larger amounts are given more weight. For example, let’s say you borrowed $5,000 at 5.0% interest and $10,000 at 3.86% interest. To find the weighted average, the math would look like this:
($5,000 x 0.05) + ($10,000 x 0.0386)
_____________________________ = 0.0424
$5,000 + $10,000
You then take the weighted average interest rate — 4.24% — and round it up to the nearest one-eighth of 1%, which brings the total to 4.25%.
One of the myths of student loan consolidation is it results in a lower interest rate. But as you can see from the math, that’s not the case. The new rate is lower than the one on the old higher-rate loan and higher than the one on the old lower-rate loan. The idea is to keep the overall interest rate on the new direct consolidation loan the same as what you’d have paid on the total of all the old loans.
Consolidating Federal Student Loans
To consolidate your student loans, start with a print or online direct consolidation loan application. These are available from Federal Student Aid (FSA), an office of the U.S. Department of Education (DOE), at studentaid.gov. It’s free to consolidate federal student loans, so beware of anyone charging a fee to do it for you. It’s a common student loan scam. Instead, head to the FSA website and follow the instructions to complete the application yourself.
Qualifications & Eligibility
Federal student loan consolidation requires no credit check, so you can consolidate your loans even if you’ve racked up debt and your credit score has taken a hit. And you can consolidate any federal student loan you haven’t already consolidated (though there are options for reconsolidation).
When you consolidate your old loans into one new federal direct consolidation loan, your old loans no longer exist. That means you could lose certain benefits on some loans, including any of the forgiveness options available, specifically for Perkins loans if you have one or more of them. If you opt to consolidate a parent PLUS loan with other loans, you lose access to all income-based repayment programs except income-contingent repayment, which offers the least favorable repayment terms. And if you’ve made any payments toward forgiveness on an IDR program, consolidating these loans wipes out your progress.
So, it pays to know when to consolidate your student loans. However, you can opt not to include any loans you’ll lose benefits on in your new consolidation loan.
In general, there’s only one eligibility requirement for federal student loan consolidation: Your loans must be in repayment or in the grace period. That only happens when you’re no longer in school.
While you’re attending school at least half-time, your student loans are automatically placed into deferment. But once you graduate, leave school, or drop below half-time enrollment, they enter into repayment. For federal loans, you have a set window after leaving school (the grace period), during which you aren’t required to make payments. For most federal loans, the grace period is six months. You can consolidate your student loans at any time during this period.
You cannot consolidate a student loan while you’re in school. But parents can consolidate a parent PLUS loan at any time.
In general, you can’t reconsolidate a loan you already consolidated. But there are limited circumstances in which it’s allowed. These include:
- You Want to Add a Loan That Wasn’t Originally Included. It could be one or more loans you received after the original consolidation loan. For example, you may have consolidated your undergraduate loans and then decided to go to graduate school. If you then want to consolidate your graduate school loans with your undergraduate ones, you can do that. You can also consolidate two consolidation loans. But you cannot reconsolidate a consolidation loan by itself.
- You Want to Get an FFEL Consolidation Loan Out of Default. If you have an older Federal Family Education Loan (FFEL) Program (a discontinued loan program that includes federal Stafford loans) consolidation loan, and it’s in default, you can get out of default by reconsolidating it as a direct consolidation loan and agreeing to make three consecutive on-time payments and to repay under an IDR plan.
- You Want to Qualify an FFEL Consolidation Loan for PSLF. To qualify for the Public Service Loan Forgiveness (PSLF) Program, you must have direct loans. Therefore, the DOE will allow you to reconsolidate your old FFEL loan to qualify.
- You’re in the Military and Want to Qualify an FFEL Consolidation Loan for the No-Interest Accrual Benefit. During periods of qualifying active-duty military service, interest does not accrue on direct loans. So if you have an older FFEL consolidation loan, the DOE will allow you to reconsolidate it with a direct consolidation loan.
Before you sit down to complete the consolidation application, you must gather all the required documents. You won’t be able to save your progress and return to it later. The information you need includes:
- Your Certified FSA ID. You’ll need your login information to complete and submit the consolidation application. If you don’t already have a verified login ID for accessing the FSA website, get one first. The Social Security Administration must specifically verify your identity, so it could take several days.
- Personal Information. You must provide your permanent address, email address, and telephone number.
- Financial Information. If you want to repay your consolidation loan under one of the IDR plans, you must provide information about your income. You can use your adjusted gross income from your most recent income tax return, which you can retrieve electronically from the IRS during the application process. If your income has changed significantly from what you reported on your tax return, you must provide your two most recent pay stubs. Because some IDR plans use both your and your spouse’s income when calculating your monthly payments, be prepared to provide spousal information if you filed a joint tax return. If you filed separately, you need your spouse’s Social Security number so the DOE can access their tax return. If their income has changed significantly since filing their taxes, you can choose instead to provide their most recent pay stubs.
- Spousal Signature. If you’re married and opt to repay through an IDR plan, your spouse must sign your application since some IDR plans include spousal income in their monthly payment calculations. Your spouse doesn’t have to be present when you fill out the application, but the DOE won’t process your application until it’s co-signed. However, unlike a traditional cosigner, your spouse isn’t obligated to repay your loans.
The Application Process
After you’ve gathered everything you need, complete the consolidation loan application online at the FSA website or print and mail a paper copy. You must complete the online process in one session, which takes about 30 minutes and consists of seven general steps:
- Select Your Loans. Enter which loans you want to consolidate. Remember, you don’t have to consolidate all your loans if you have loans with perks you want to retain, such as Perkins loans, or any you’ve already been paying on under an IDR program.
- Select a Servicer. You can select the agency you want to manage your loans from the provided list of federal student loan servicers. Although your loan servicer manages your billing and repayment, they don’t have control over your loan terms, as the federal government establishes them. So if you’re happy with your current servicer, there’s no need to switch. However, if you’re unhappy, consolidation provides one of the only ways to change your servicer. Common reasons for complaints include the failure to provide information about repayment options and misapplication of payments.
- Choose a Student Loan Repayment Plan. You can opt to continue repaying your loans on the standard 10-year repayment plan or select any other plans for repaying federal direct student loans: graduated repayment, extended repayment, or one of the IDR plans. If you choose an IDR plan, you must also fill out an income-driven repayment plan request.
- Read All the Terms. Before submitting your application, be sure you understand all the terms and conditions. Once you sign the application, it becomes a binding contract. And once you consolidate your loans, you won’t be able to undo it.
- Sign Your Application. The DOE can’t process your application without a signature, whether handwritten or electronic. If you’re married and applying for repayment under an IDR plan, your spouse must also sign.
- Continue Making Payments. It takes 30 to 90 days to process your consolidation application and grant your new loan to pay off your old ones. Your new loan servicer will let you know when your first payment is due. If any of your loans are in the grace period, you can let your servicer know you want to delay your application until the grace period has ended. However, if you’re already in repayment, you must continue to make payments on your old loans until your new consolidation loan is processed. If you’re unable to make payments, you can apply for a deferment or forbearance.
- Contact Your Student Loan Servicer With Any Questions. If you have any questions about your application or continuing to make payments, contact the servicer you selected on your application to manage your loans. If you need their contact information, you can find it on FSA’s website. To ask questions about consolidating your loans before applying, contact the student loan support center at 800-557-7394.
Although figuring out the best way to pay back your student loans can be complicated, consolidation doesn’t have to be. Fortunately, it’s an easy, straightforward process that generally simplifies repayment.
Just keep in mind that as tempting as it can be to extend your repayment term to get lower monthly payments, if you can afford them on the 10-year repayment schedule, it’s best to stick with it. If you’re seriously struggling to make your monthly payment, IDR, with its 25- and 30-year repayment schedules, can help. But if you can make your payment — even if it’s a bit of a stretch — you’ll save far more in the long run if you pay off your loan as quickly as possible.