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Should I Consolidate My Federal Student Loans? – When It Makes Sense

Federal student loan consolidation can help you manage multiple monthly payments to multiple servicers.

If like the vast majority of college graduates, you acquired student loan debt through federal student aid, you likely have more than one loan, which means more than one bill. Trying to juggle them all can quickly get confusing and even overwhelming as you struggle to keep track of who you owe what and when.

Fortunately, student loan consolidation allows you to combine all those payments into one simplified monthly bill. But while this makes the repayment process easier, consolidation isn’t always a good idea. There are times you should definitely think twice before wiping out your old student loans with a new one.

What Is Student Loan Consolidation?

Consolidating your student loans means combining all your old loans into one new loan. The government issues you a single federal direct consolidation loan in the total amount of your original loans.

The new consolidation loan pays off the original loans, leaving you with only one consolidation loan to repay. So you’ll have one new monthly payment to only one loan servicer — the company that manages your repayment on behalf of the federal government (your lender).

Other than combining your loans, the rest remains roughly the same. You still owe the same amount. And your new interest rate stays about the same as the combined weighted average of all your old loans.

But you will get the chance to choose one of the federal government’s repayment plans, several of which include the option of extending your repayment as long as 30 years. However, if you continue to repay on the standard 10-year repayment plan, not much will change.

When to Consolidate Your Student Loans

The purpose of the direct consolidation loan program is to simplify the repayment process. It also makes many programs for repayment available on otherwise-ineligible student loans. So if you want to make only one single monthly payment, lower your monthly payment, or apply for an income-driven repayment plan, student loan consolidation may be for you.

It’s not right for everyone. But there are certain circumstances under which federal student loan consolidation makes sense.

1. You Want to Make a Single Monthly Payment

Making one monthly payment to a single institution is a popular reason for consolidating your student loans. It also makes consolidation an optimal choice for most borrowers, regardless of their financial circumstances.

Multiple bills from multiple lenders come with different amounts due and different due dates, making it difficult to budget and keep track of payments. It can lead to missed payments and confusion about the total amounts left to repay. If you’d rather worry about only one bill every month, consolidation allows you to do that.

2. You Want Lower Monthly Payments

If you’re struggling to pay your student loans every month, consolidation can make it easier. By opting for one of the repayment plans that allows you to extend the repayment term, you’ll automatically lower your monthly student loan payment. These include extended repayment, graduated repayment, and income-driven repayment (IDR).

Note that each of these comes with different term lengths and repayment requirements. So how long it takes to repay depends on which student loan repayment option you select. It can also depend on the total amount you borrowed, with some programs allowing longer repayment terms for larger loan amounts.

But be aware that this almost always means paying more on your student loans over the long term. Your interest rate won’t go down. It remains fixed for the life of the loan. And when you’re paying the same interest over a longer period, you end up paying a lot more of it.

3. You Want to Qualify for Income-Driven Repayment

IDR repayment plans are the only way to lower your monthly payment while getting access to student loan forgiveness programs, including the Public Service Loan Forgiveness (PSLF) Program.

PSLF allows borrowers who make payments under an IDR plan while working full-time for a public agency or nonprofit to have their loan balances forgiven after only 10 years. That’s the same length of time as the standard repayment plan.

While all federal direct subsidized and unsubsidized loans are eligible for IDR plans, other loans must be part of a direct consolidation loan to qualify. These include subsidized and unsubsidized Stafford loans, federal PLUS loans for graduate and professional students, and federal Perkins loans.

But be aware that if you’ve already made any qualifying payments toward forgiveness on any direct loans, consolidating them with your other loans restarts the process. In other words, you’ll lose credit for any payments you’ve already made.

4. You’re in Default

Most federal student loans go into default when you fail to make payments for 270 days, or roughly nine months. Federal Perkins loans can go into default immediately if you don’t make a payment by the due date.

Once you’re in default, your loan becomes due in full, and you no longer have access to federal repayment programs. You also owe any unpaid interest and any fees associated with collecting on the amount.

Worse, the federal government has extraordinary powers to collect on the amount owed, including garnishing your wages, seizing your tax refunds, and garnishing your Social Security. They can do all of that without having to go through the process of suing you.

There are three ways you can get out of default: pay the balance in full, go through the process of student loan rehabilitation, or consolidate your loans. If you can’t pay the balance in full, consolidation is the fastest route out of default. To qualify, you must make three consecutive monthly payments on time and agree to repay your loans under an IDR plan.

Going this route makes the most sense if you need to get out of default quickly. But note that consolidation will not remove the default line from your credit report. Only student loan rehabilitation can do that.

To rehabilitate your loans, you must make nine monthly loan payments within 10 consecutive months. Your payments must be 15% of your discretionary income. Your discretionary income is the difference between your adjusted gross income from your tax return and a certain percentage of the poverty level for a family of your size in your state of residence. The percentage varies among repayment plans but is generally 150%.

You can only rehabilitate your loans once, so if you opt to do that, make sure you can afford the payments.


When Not to Consolidate Your Student Loans

Student loan consolidation is a suitable strategy for simplifying or lowering monthly payments, but it’s not always beneficial. Consolidation could mean you lose access to certain benefits, and once you consolidate your loans, you can’t reverse them.

Fortunately, you don’t have to consolidate all your loans. You can always keep any loans for which you don’t want to lose certain borrower benefits out of consolidation.

1. You Have a Perkins Loan

Perkins loans were low-interest student loans for undergraduate and graduate student loan borrowers with extreme financial need. It’s no longer possible to get a Perkins loan, as the government discontinued the program on Sept. 30, 2017.

But if you already have one, the repayment plans available for Perkins loans are very different from those for other federal student loans. To learn about options for Perkins repayment, you need to speak with either the school that made the loan or your servicer.

One of the unique options for Perkins loans is the ability to have them forgiven in exchange for working in certain professions in high-need areas. But note that if you consolidate your Perkins loan with your other loans, you’ll lose access to the Perkins loan cancellation program. That’s because if you consolidate your loan, you no longer have a Perkins loan. You have a federal direct consolidation loan.

2. You’ve Been Paying Under an IDR Plan

Only direct loans qualify for most IDR plans, with the single exception of income-based repayment, which allows income-based repayment on Stafford loans. So consolidating your loans will give you access to all the IDR programs if you have any non-direct loans.

However, if you’ve been paying on any direct loans under an IDR plan, if you consolidate them into a new loan, you lose whatever progress you’ve made on them. That’s because the old loan no longer exists.

For example, let’s say you’re attempting to qualify for PSLF, and you’ve made one year of payments on one of your direct loans under an IDR plan. That means you only have to make another nine years of payments on that loan before you could qualify to have your balance forgiven.

But you have other student loans. So you decide to consolidate all your loans together and put them all into IDR to work toward PSLF. If you do that, you lose credit for all the payments made on that first loan, and the clock resets to zero. That means 10 more years of payments on that loan, not nine.

The best thing to do in this case is keep the original loan off the new direct consolidation loan application while consolidating the rest so they also qualify for PSLF.

3. You Have a Parent PLUS Loan

If you borrowed for your own education and are still paying on those loans along with a parent PLUS loan you took out to help pay for your child’s education, don’t consolidate them.

You’ll lose eligibility for all repayment options except for income-contingent repayment (ICR), which is the least favorable of the IDR programs. ICR’s calculation for discretionary income allows less room, and monthly payments are calculated as a higher percentage of your discretionary income.

Also, while both students and parents can consolidate their loans, students and parents cannot consolidate theirs together. You can only consolidate your own loans.

4. You Want to Consolidate Private & Federal Loans

You can only consolidate federal loans through the federal direct consolidation program. If you have private loans you want to consolidate with your federal ones, the only way to do that is through refinancing.

Refinancing is like consolidation in that all your current loans combine into a single loan. However, the money comes from a private lender, not the federal government.

Plus, refinancing has its drawbacks. It can be tough to qualify, as your credit score needs to be impeccable. And if you refinance your government loans along with your private loans, you lose access to all the government repayment programs because you don’t have a federal loan anymore (it’s a private one). That includes IDR and more generous forbearance and forgiveness terms.

5. You Want to Save Money on Repayment

Although consolidation simplifies payment and can even reduce your monthly payment, you’re not likely to save any money in the long run by consolidating your loans.

First, your interest rate won’t be any lower after consolidation. The rate on your new consolidation loan is the weighted average of the interest rates of all your old loans rounded up to the nearest one-eighth of 1%. That means it stays roughly the same as it was before.

Second, if you opt for any repayment term longer than the standard 10-year plan, you could be looking at paying thousands or even tens of thousands more over the life of the loan thanks to accruing interest.

Third, any unpaid interest on your loans is capitalized with the principal balance at the time of consolidation. That means it’s added to the original balance, so you end up paying interest on a new, higher balance with your consolidation loan. In other words, you pay interest on top of interest.

If you’re able to qualify, refinancing is the only way to both consolidate all your loans and save money on repayment. Private student loan refinancing lenders such as SoFi stay competitive with each other by offering the lowest interest rates. A lower interest rate on your loan means you repay less overall and your monthly payment could even be lower. But always be cautious about refinancing federal loans, as it means losing access to federal programs.


Final Word

Figuring out the best way to pay back your student loans can be complicated. It involves weighing the repayment plan that will give you the best long-term savings against your ability to manage your life and student loan debt today. Compounding the situation, it may take college graduates a while to find a job, and entry-level work isn’t often well-paying once they do.

Thankfully, there’s a variety of programs available to make repayment of federal education loans easier. Even better, you aren’t locked into most of them. When your life or income changes, you can always opt to switch to a different repayment plan.

But that’s not the case with consolidation. Once you consolidate, it’s irreversible because your old loans are effectively gone. So think carefully before consolidating and make sure you understand what it will mean for you and your future.

Sarah Graves
Sarah Graves, Ph.D. is a freelance writer specializing in personal finance, parenting, education, and creative entrepreneurship. She's also a college instructor of English and humanities. When not busy writing or teaching her students the proper use of a semicolon, you can find her hanging out with her awesome husband and adorable son watching way too many superhero movies.

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