Student Loan Consolidation: Pros and Cons To Know Before You Apply in 2025

Consolidating federal student loans into a single loan via a federal Direct Consolidation Loan is a popular option among borrowers. In 2024, Direct Consolidation Loans represented $62.2 billion of the total $147.7 billion disbursed for federal student loans, according to the Fiscal Year 2024 Annual Report from the Department of Education. 

But there are some important benefits and drawbacks associated with federal loan consolidation that borrowers should consider before using a Direct Consolidation Loan to combine their federal student loans.

Here’s what you need to know about the pros and cons of student loan consolidation.

Current student loan refinance rates

What is student loan consolidation?

Student loan consolidation is only available via federal Direct Consolidation Loan. This loan type, offered through the U.S. Department of Education, allows a borrower to combine multiple federal student loans into one, streamlining the repayment process and typically extending the repayment period. Since Direct Consolidation Loans are part of the federal student aid program, there’s no application fee to apply.

Keep in mind that loan consolidation only applies to federal student loans. Borrowers who have a mix of federal and private student loans can’t consolidate both types of loans together.

Adam S. Minsky, an attorney who focuses on helping student loan borrowers, explains that student loan consolidation leaves the borrower’s interest rate basically unchanged. 

“Some people think that consolidating their federal student loans will increase or lower their interest rate,” Minsky says. “But the consolidation loan interest rate is the weighted average of the interest rates of the underlying loans being consolidated, rounded up to the nearest eighth of a point.”

What are the pros of student loan consolidation?

There are a number of benefits to student loan consolidation, including:

• Simplified payments: Dr. Darla Bishop, author of “How To Afford College,” explains that consolidation can be helpful to borrowers with multiple loans and lots of loan servicers. “Instead of having to sign in to Nelnet and MOHELA and Edfinancial separately,” she says, “consolidation means you’re only making payments to 1 servicer.”
• Access to alternative repayment plans: Consolidation may give you access to income-driven repayment plans or student loan forgiveness options.
• Can help borrowers in default return to good standing: A borrower in default can return to good standing with a consolidation loan if they either agree to repay the new consolidation loan under an income-driven repayment plan, or they make 3 consecutive, on-time payments on the defaulted loan before applying for consolidation.
• May extend loan term for lower monthly payments: Consolidation typically extends your repayment term, which means monthly payments will be lower for the consolidated loan than they were for the original loans.

Further Reading: How To Consolidate Student Loans: Benefits and Steps to Take

What are the cons of student loan consolidation?

Consolidation isn’t necessarily right for every borrower. Here are some of the drawbacks of consolidation that you should keep in mind:

• The consolidated interest rate becomes the weighted average: Consolidating your loan will not lower your interest rate. Instead, it’ll become the weighted average of the interest rates of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent.
• May lose credit toward loan forgiveness: “Consolidating can reset a loan forgiveness timeline for income-driven repayment loan forgiveness,” Minsky says. 
• Extending the repayment term can mean paying more interest over time: A longer repayment term can increase your total interest costs over the life of the loan.
• May trigger interest capitalization: If you have unpaid interest at the time of consolidation, the interest will be added to the principal balance of the new loan.
• Private loans aren’t eligible: Borrowers may only consolidate their federal student loans.

How is consolidation different from refinancing?

Student loan consolidation and student loan refinancing sound similar and may sometimes be used interchangeably, but it’s important not to confuse the two.

Refinancing is done through private lenders. When you refinance your student loans, you take out a new private loan to pay off your original loans. 

Read More: Should I Refinance My Student Loans?

Refinancing can lower your interest rate if you have strong credit and a steady income. This is unlike consolidation, which uses a weighted average of the loans you’re consolidating, meaning you basically keep the same interest rate before and after consolidation. 

Additionally, while consolidation is only available for federal student loans, borrowers can refinance both federal and private student loans. This can make repayment easier by streamlining your payments, but you’ll lose access to federal student loan protections like loan forgiveness and income-driven repayment plans.

See Also: Refinancing Federal Student Loans: Pros and Cons

When does student loan consolidation make sense?

You might want to consider student consolidation if any of the following scenarios apply: 

• You want to qualify for an alternative repayment plan: If you’re consolidating any federal student loans other than Direct Loans, consolidation may give you access to income-driven repayment and programs like Public Service Loan Forgiveness, which you wouldn’t otherwise be eligible for.
• You have multiple loan servicers: Dealing with more than one loan servicer and monthly payment can be confusing and stressful. Consolidation allows you to streamline repayment so you only have 1 servicer and payment.
• You’re in default and want to regain good standing: Consolidation is a valid way to return your federal student loans to good standing after default. 

Check Out: How To Get Out of Student Loan Default