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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 existing private student loans or consolidate federal student loans and existing private student loans together, you will need to explore student loan refinancing with a private loan lender rather than new direct consolidation loans.

What Types of Student Loans Can Be Consolidated?

When exploring a new Direct Consolidation Loan it’s important to note that this option is only available for federal student loans only. If you have all private loans or a mix of both private loans and federal loans, the best option would be to look into student loan refinancing through a private loan lender.

Student 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 pursue a new direct consolidation loan depends on what you want to achieve. Here are some of the reasons you may want to consolidate your federal student loans.

Benefits of Consolidating Federal Student Loans

  • A single monthly payment will streamline new direct consolidation loan repayment.
  • Consolidation of federal student aid provides access to alternate loan consolidation repayment plans that can reduce the monthly federal 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 these federal loans into a new 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 existing federal student loans into a new Direct Loan program through consolidation.
  • Depending on your outstanding federal education loan debt balance, you can increase your federal education loan term by consolidating, which also means you will have a lower monthly payment with a new direct consolidation loan.
  • A consolidation loan may be used to switch federal loan servicers if you don’t like your current federal loan servicer.

Drawbacks to Consolidating Student Loans

  • Your goal is to lower your federal loan interest rate, 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 student loans included in direct loan consolidation. It may even increase the costs slightly since the weighted average interest rate of a new direct consolidation loan 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 federal student loan(s) with a private student loan refinance lender.
  • While direct loan 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 on their student loans. Choosing a longer repayment term also often means that you may still be repaying your student loans when your children are applying for their own federal student aid because the repayment term can be as long as 30 years.
  • If the interest rates on the separate student loans differ significantly, you may be able to save money by accelerating repayment of the federal education loans with the highest interest rate. You cannot target the highest-rate student loans for early repayment if the student loans have been consolidated.
  • If you have yet to exhaust the entire grace period on your student loans, and you decide to consolidate them, 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 Student 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. Perkins 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 Federal Student Loans

To consolidate your federal 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 for a new Direct Consolidation Loan application:

  • 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 Direct Consolidation Loan application in roughly 30 minutes or fewer online. If you do not want to apply for a new Direct Consolidation Loan online, paper applications are available for download.

Questions to Ask When Consolidating Federal Student Loans

Will I lose credit toward existing repayment plans on my federal loans?

Yes. When you consolidate your federal 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 public service loan forgiveness and/or income-driven repayment plan forgiveness regarding on those specific student loans you consolidate.

How much does it cost to consolidate federal student loans?

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

Federal Student Loan Consolidation FAQs

Is it smart to consolidate your federal 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 student 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 the new direct consolidation loan with an income-contingent repayment plan.

Can you consolidate private student loans?

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

Can Grad PLUS loans be consolidated?

Yes. Grad PLUS Loans are eligible for a new Direct Consolidation Loan. You may also choose to consolidate your undergraduate and graduate loans together, as long as they are all federal education loans rather than private education loans.

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 education 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 new 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 education loan refinancing allows you to shop around for the best interest rate.

How do I find my student loan account number?

Log into studentaid.gov with your FSA ID to locate information related to your federal education 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 federal student loan statement.

When can I consolidate my student loans?

You may fill out a direct consolidation loan application 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 repaying your consolidation loan right away.

Could student loan refinancing save you money?