Student Loan Consolidation: Pros and Cons

Repaying your student loans can be a confusing experience, especially if you’ve accumulated multiple loans over the years. To simplify repayment, some borrowers opt for a federal Direct Consolidation Loan, which can combine multiple federal student loans into one. 

The concept of consolidation exists for other types of consumer debt, but in the context of federal student loans, it can have various outcomes. This guide will cover student loan consolidation pros and cons you should be aware of before jumping headfirst into this repayment option.

Why consolidate student loans?

Consolidating your federal student loans has the power to change their classification within the federal student loan system. 

For example, if you consolidate a federal Stafford Loan from the Federal Family Education Loan (FFEL) program, the debt is reclassified as a Direct Consolidation Loan under the William D. Ford Federal Direct Loan program. This new classification opens valuable opportunities, like unlocking loan forgiveness programs or decluttering your loan accounts, which might not have been possible otherwise.

Consolidating your loans can also make it easier to keep track of the debt you owe by combining multiple federal loans into one Direct Consolidation Loan with one monthly payment. 

Related: Student Loan Consolidation: Is It Right For Me?

Pros of student loan consolidation

Below are five benefits that a Direct Consolidation Loan unlocks for borrowers.

1. Simplify your loan repayment

Keeping track of multiple loan accounts with different balances, interest rates, payment due dates, and terms can be hectic. Consolidating various student loans can make managing your repayment more straightforward.

When combining two or more loans through consolidation, you’ll end up with one loan for the total amount of your combined unpaid balances. This loan will have a single due date and repayment schedule. The interest on this loan will be a weighted average of your consolidated debt, rounded up to the nearest one-eighth of 1%.

2. Lower your monthly payments

Direct Consolidation Loans offer a standard repayment term of 10 to 30 years, depending on the amount you consolidated. By significantly stretching your repayment over a longer term, you can lower your monthly payments.

For example, if you have a loan amount of $45,000 at a 4% interest rate over 10 years, your monthly payment would be $456. With a Direct Consolidation Loan, your term for this amount would be 25 years and your monthly payment would be reduced by nearly half to $238.

3. Gain access to IDR and forgiveness

Some federal student loans aren’t eligible for income-driven repayment (IDR) plans and certain loan forgiveness programs. However, consolidating ineligible loans with a Direct Consolidation Loan might help you access these federal benefits.

For example, federal Perkins Loans and FFEL program loans aren’t eligible for Public Service Loan Forgiveness (PSLF). Only Direct Loans qualify for PSLF, including loans that were consolidated with a Direct Consolidation Loan.

Similarly, consolidating loans that aren’t Direct Loans may grant you access to forgiveness by allowing you to switch to an income-driven repayment plan. These plans are designed to clear your remaining debt after making 20 or 25 years of payments, depending on the IDR plan.

4. Change loan servicers 

When you received your original student loan, the Department of Education automatically assigned your loan account to a servicer. Your loan servicer handles your billing and is your point of contact for repayment options, consolidation, and other loan-related services. 

If for any reason you want to switch your servicer, the only way to do so while keeping the debt within the federal system is through consolidation. 

5. Switch to a fixed-rate loan

Today, federal student loans offer a fixed interest rate. However, many federal loans that were disbursed before July 1, 2006, have a variable rate. A variable student loan rate causes your monthly payments to change, making it hard to budget your finances and project your total borrowing costs.

Consolidating your variable-rate loan into a Direct Consolidation Loan offers you a fixed interest rate for the life of the loan, so you don’t need to worry about your payments increasing. 

Cons of student loan consolidation

Although there are scenarios when consolidating student loans might make sense, there are also downsides you should be aware of. 

1. You might not save money

If you’re not pursuing income-driven repayment or loan forgiveness, a Direct Consolidation Loan won’t necessarily save you money. Any unpaid interest on a loan that you’re consolidating is added to your new principal balance. This process is called capitalization, and it means that moving forward you’ll pay interest on your old, unpaid accrued interest.

Your fixed Direct Consolidation Loan rate is the weighted average interest rate — rounded up to the nearest one-eighth of 1% — of the loans included in the consolidation.

Related: What Increases Your Total Loan Balance?

2. You may pay more interest over time

Extending your repayment term and thereby lowering your payment can be seen as a benefit, but there’s a downside, too. The longer your repayment period, the more you might pay in interest over the life of the loan. 

Additionally, if you have any unpaid interest on the loans that you consolidated, this amount will be added onto your new principal loan balance. A higher loan balance means you’ll risk paying more in interest than you would have if you didn’t consolidate.

3. You might lose important benefits

Putting your education loans through consolidation isn’t right for everyone. The act of consolidation essentially closes your original loan accounts, and creates a new Direct Consolidation Loan in their place.

This movement might result in lost benefits, like interest discounts and principal rebates that your original loan offered. For example, consolidating a Perkins Loan disqualifies you from reaching Perkins Loan cancellation.

Additionally, any payment credit you’ve earned toward loan forgiveness is typically lost through consolidation; you’re ultimately starting fresh. There’s a one-time payment count adjustment that’s expected to continue until July 2024 — this preserves your original payment credit before consolidation, but this program is temporary. 

What to consider before consolidating

If you want to make a change regarding your loans, a Direct Consolidation Loan shouldn’t be your default option. Better solutions might be available based on your circumstances. 

Before applying for consolidation, ask yourself: 

1. What do I need right now? How urgently is it needed?
2. What might happen if I don’t make any changes to my loan? 
3. What are my long-term student loan repayment goals? 
4. What options can my loan servicer provide?

If your monthly payments are overwhelming you, ask your servicer whether you qualify for an income-driven repayment plan. This approach can be a long-term way to keep payments low, sometimes as low as $0 monthly. 

Alternatively, a private student loan refinance might make more sense for getting out of debt quickly and at the lowest rate. If you meet the refinance lender’s borrowing criteria, you might secure a competitive rate that reduces your total borrowing costs over time. 

Just note that by refinancing your federal loans, you’ll lose access to federal protections and benefits like forgiveness and income-driven repayment options. Be sure to carefully consider whether refinancing makes sense for you.