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Could student loan refinancing save you money?
Could student loan refinancing save you money?

Federal Student Loan Consolidation

What is Student Loan Consolidation?

Federal student loan consolidation is a process by which you combine several federal student loans into one new loan called a Direct Consolidation Loan. A Direct Consolidation Loan can only be used for federal student loans. If you are looking to consolidate private student loans or consolidate federal and private student loans together, you will need to explore student loan refinancing with a private lender.

What Types of Student Loans Can Be Consolidated?

When exploring a Direct Consolidation Loan it’s important to note that this option is only available for federal student loans. Loans eligible for a Direct Consolidation Loan include:

  • Subsidized student loans
  • Unsubsidized student loans
  • Parent PLUS Loans
  • Grad PLUS Loans
  • Perkins Loans

Student Loan Consolidation Rates

Unlike private student loan refinancing, where you may compare lenders and shop around for the best interest rate, a Direct Consolidation Loan will use the weighted average interest rate of your existing loans rounded up to the nearest 1/8 of a percent to determine your new interest rate. That means, your rate will stay roughly the same. You can learn how weighted average interest is calculated here. We also recommend using our student loan refinance calculator to get a snapshot of what to expect when you consolidate.

If your aim is to lower your interest rate, you will want to pursue private student loan refinance.

Best Student Loan Refinance Lenders

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.25% APR1

Fixed as low as: 2.74% APR1

Repayment Terms

5, 7, 10, 15, 20 years

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.94% APR1

Fixed as low as: 2.99% APR1

Repayment Terms

5, 10, or 15 years2

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable: 1.74% APR - 5.74% APR2

Fixed: 3.49% APR - 6.99% APR2

Repayment Terms

10-yr/20-yr repayment term based on creditworthiness

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.15% APR1

Fixed as low as: 2.99% APR1

Repayment Terms

5, 8, 12, or 15 years

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable Rates: Rates between 1.95% - 5.63 APR1

Fixed Rates:  Rates between 2.55% - 5.59% APR1

Repayment Terms

5, 10, 15, 20, 25 years

 

Should I Consolidate My Student Loans?

Whether or not you should consolidate depends on what you want to achieve. Here are some of the reasons you may want to consolidate your loans.

Why to Consolidate Student Loans

  • A single monthly payment will streamline repayment.
  • Consolidation of federal student loans provides access to alternate repayment plans that can reduce the monthly loan payment by increasing the term of the loan. This can free up money to repay loans with higher interest rates, such as credit cards, that also do not provide tax-deductible interest.
  • If you have FFELP loans which are not eligible for certain income-driven repayment plans, military benefits, or public service loan forgiveness, you can consolidate with Direct Consolidation Loan to become eligible.
  • If you are interested in Public Service Loan Forgiveness and you do not have federal Direct Loans, you will need to move your student loans into the Direct Loan program through consolidation.
  • Depending on your outstanding education loan debt balance, you can increase your loan term by consolidating, which also means you will have a lower monthly payment.
  • Consolidation may be used to switch loan servicers if you don’t like your current servicer.

Why Not to Consolidate Student Loans

  • Your goal is to lower your interest rate on your student loans. Consolidating fixed-rate federal student loans does not save you any money, since the interest rate on a federal consolidation loan is based on the weighted average of the interest rates on the loans included in the consolidation loan. It may even increase the costs slightly since the weighted average interest rate is rounded up to the nearest 1/8th of a point. If your goal is to lower your interest rate, you should consider refinancing your student loan(s) with a private student loan refinance lender.
  • While consolidation may yield a lower monthly payment because of a longer repayment term, a longer repayment term may cause you to pay more interest over the life of the loan. Some borrowers are tempted to choose the repayment plan with the lowest monthly payment, even when they can afford to make a higher monthly payment. Choosing a longer repayment term also often means that you may still be repaying your student loans when your children enroll in college.
  • If the interest rates on the separate loans differ significantly, you may be able to save money by accelerating repayment of the loans with the highest interest rate. You cannot target the highest-rate loans for early repayment if the loans have been consolidated.
  • If you have yet to exhaust the entire grace period on your loans, and you decide to consolidate your student loans, you will lose the remainder of your grace period immediately. Direct Consolidation Loans do not have a grace period and will enter repayment immediately after the consolidation is complete.
  • And outstanding unpaid interest is capitalized when federal education loans are consolidated. You will increase your outstanding principal balance on your loans once interest is capitalized.

Perkins Loans lose several important benefits when they are included in a consolidation loan. If you include a federal Perkins Loan in your Direct Consolidation, your Perkins Loan funds will no longer be considered a subsidized loan, and you would no longer be eligible for federal Perkins Loan cancellation options. Perkin Loan cancellation (otherwise known as forgiveness) is known to be generous and offered to a variety of borrowers who work in particular occupations.

How to Consolidate Student Loans

To consolidate student loans you will first need to log into your account at studentaid.gov with your FSA ID. There you can complete the Direct Consolidation Loan application. You will need the following information:

  • FSA ID
  • Personal information such as personal address, email address and phone number
  • Financial information such as income

You will be able to complete the application for student loan consolidation in roughly 30 minutes or fewer online. If you do not want to apply online, paper applications are available for download.

Questions to Ask When Consolidating Student Loans

Will I lose credit toward existing repayment plans?

Yes. When you consolidate your student loans it will resent your payments for both income-driven repayment plan forgiveness, and Public Service Loan Forgiveness (PSLF). Which essentially means you will lose your “credit” toward forgiveness on those specific loans you consolidate.

How much does it cost to consolidate student loans?

Student loan consolidation is free through the Direct Consolidation Loan program.

Student Loan Consolidation FAQs

Is it smart to consolidate your student loans?

Consolidating your student loans may be the right move depending on what you want to accomplish. If you want to reduce your monthly payment by lengthening your repayment term, or roll multiple loans into one, it may be the right option for you. If you have a Parent PLUS Loan and want to qualify for Public Service Loan Forgiveness, you will need to consolidate your loans and repay that consolidation loan with an income-contingent repayment plan.

Can you consolidate private student loans?

You cannot consolidate private student loans with a Direct Consolidation Loan because they are not federal student loans. However, you may choose to refinance private student loans—or refinance federal and private student loans together—with a private lender.

Best Student Loan Refinance Lenders

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.25% APR1

Fixed as low as: 2.74% APR1

Repayment Terms

5, 7, 10, 15, 20 years

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.94% APR1

Fixed as low as: 2.99% APR1

Repayment Terms

5, 10, or 15 years2

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable: 1.74% APR - 5.74% APR2

Fixed: 3.49% APR - 6.99% APR2

Repayment Terms

10-yr/20-yr repayment term based on creditworthiness

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.15% APR1

Fixed as low as: 2.99% APR1

Repayment Terms

5, 8, 12, or 15 years

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable Rates: Rates between 1.95% - 5.63 APR1

Fixed Rates:  Rates between 2.55% - 5.59% APR1

Repayment Terms

5, 10, 15, 20, 25 years

 

Can Grad PLUS loans be consolidated?

Yes. Grad PLUS Loans are eligible for a Direct Consolidation Loan. You may also choose to consolidate your undergraduate and graduate loans together.

Can you consolidate Parent PLUS Loans?

Yes. Parent PLUS Loans are eligible for consolidation, by their borrower, the parent. If the parent has their own student loans, they may include these loans in the consolidation.

Best Companies for Parent Student Loan Refinance

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.25% APR1

Fixed as low as: 2.74% APR1

Repayment Terms

5, 7, 10, 15, 20 years

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.15% APR1

Fixed as low as: 2.99% APR1

Repayment Terms

5, 8, 12, or 15 years

 

The child who benefitted from the loan can not include parent PLUS Loans that they are not the listed borrower of, in a consolidation loan under their name. In other words, the debt can’t be transferred to the child in the federal student loan program. However, some private student refinance lenders will allow parents to transfer their debt to their child with a private student loan refinance loan. The child would need to qualify for the refinance loan on their own.

Can you consolidate Parent PLUS Loans with student loans?

Yes. If you as the parent have Parent PLUS Loans as well as your own student loans you may consolidate those together. You may not consolidate Parent PLUS Loans with federal student loans borrowed in your child’s name. Those loans would need to be consolidated separately by your child.

Can you consolidate federal student loans?

Yes. In fact, the Direct Consolidation Loan is specifically for consolidating federal student loans.

Can my spouse and I consolidate student loans?

No. You may not consolidate federal student loans with your spouse through the Direct Consolidation Loan program, however some private lenders such as PenFed will allow you to consolidate your student loans with your spouse via a private student loan refinance.

Are consolidated student loans eligible for forgiveness?

If you have a Direct Consolidation Loan, your loan could be eligible for Public Service Loan Forgiveness you if you meet all the required eligibility criteria. Federal consolidation loans also qualify for all federal discharge options, which includes, discharge upon death of the borrower (or child who benefitted from the loan), or total and permanent disability.

How to consolidate student loans for a lower interest rate

If you’re looking to lower your interest rate, you will want to consolidate your student loans with a private lender (referred to as student loan refinance). Private student loan refinance allows you to shop around for the best interest rate.

Best Student Loan Refinance Lenders

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.25% APR1

Fixed as low as: 2.74% APR1

Repayment Terms

5, 7, 10, 15, 20 years

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.94% APR1

Fixed as low as: 2.99% APR1

Repayment Terms

5, 10, or 15 years2

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable: 1.74% APR - 5.74% APR2

Fixed: 3.49% APR - 6.99% APR2

Repayment Terms

10-yr/20-yr repayment term based on creditworthiness

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable as low as: 2.15% APR1

Fixed as low as: 2.99% APR1

Repayment Terms

5, 8, 12, or 15 years

Recommendation
Best for Student Loan Refinancing
Interest Rates

Variable Rates: Rates between 1.95% - 5.63 APR1

Fixed Rates:  Rates between 2.55% - 5.59% APR1

Repayment Terms

5, 10, 15, 20, 25 years

 

How do I find my student loan account number?

Log into studentaid.gov with your FSA ID to locate information related to your loans. There you will be able to see all of your current federal student loans, balances and the student loan servicers. You can also log into your student loan portal with your student loan servicer. Or you can check your student loan statement.

When can I consolidate my student loans?

You may consolidate your student loans at any time once they have entered the grace period, however if you consolidate student loans before the end of your six-month grace period, you will need to begin repayment right away.

Could student loan refinancing save you money?