How to Consolidate Your Federal Student Loans

Renee Layberry
May 4, 2021

As the economy changes in response to the coronavirus, you may find your financial situation is less secure than ever. If it's becoming difficult to make your federal student loan payments, you may want to look into student loan consolidation.   Consolidating can make repaying your loans more manageable by allowing you a longer period of time to make payments. Plus, the new monthly payments can be much lower. Consolidation is a far better option than defaulting on your loans, which can ruin your credit rating for years to come.   Keep reading to find out more about federal student loan consolidation and whether it’s right for you.  

What is loan consolidation?

When you consolidate your student loans, you combine them into one new loan. The goal of this new loan is that your one new monthly payment will be lower than the amount you were paying before. If your new loan has a lower interest rate, it might even save you money over time. Certainly, the smaller monthly payments will make your life easier right now.  

Am I a good candidate for consolidating my student loans?

The first requirement for loan consolidation is that you have two or more federal student loans. Having more than one federal loan means you can apply to consolidate all of them into one Direct Consolidated Loan (DCL). There’s no fee for applying and no cost to consolidate if you are approved.   In order to be eligible for a DCL, you must have been repaying your loans on time, or be in an approved grace period.   If you are in default which means that you’re behind on your payments you will need to pay your minimum payment for three consecutive months before you can qualify for consolidation.    More >> How to make your student loan payment on time every time   And if a judgment has been issued and your wages are being garnished, you will need the court to lift that order before proceeding.   While you can’t include private loans in your federal direct consolidation, make note of them in your application. The federal government factors private loan payments into your discretionary income. What that means is that you’ll end up with a lower monthly payment on your consolidated loan.   The DCL application itself takes about 30 minutes to complete online. All you need to do is fill out the Federal Direct Consolidation Loan Application and Promissory Note, selecting the federal loans you’d like to include in the consolidation.   Photo by Evan Mach

When should I consolidate my federal student loans?

You can consolidate loans as soon as you graduate; in fact, the faster you consolidate, the less likely you are to fall behind in payments. And given that most new graduates need time to build up income and savings, consolidating allows you to make lower payments while you get more financially settled.   If you haven’t graduated yet, but are attending school less than half-time, you can consolidate your loans.   Consolidating may also be a good option if you are working full-time and taking one class a semester.   You can also apply for consolidation if you’ve left school altogether.  

What are the benefits of consolidating my federal student loans?

One major benefit of consolidating loans is that you may only have one payment to manage every month. It’s just more convenient!   Another benefit is that you’ll likely end up with a lower monthly payment than the sum of all your individual federal student loan payments. That’s because a consolidated loan will generally be for a longer period of time (up to 30 years), so your minimum monthly payment will be smaller.   You may also be eligible for a lower interest rate. With just one loan, you may qualify for a fixed interest rate. A consistent interest rate will ensure that your payments don’t balloon when variable interest rates fluctuate.   You’ll get a breather too. When you consolidate your federal student loans, you’ll start your new monthly payments 60 days after you receive your consolidated loan. If you’re short on cash or have some upcoming expenses, two payment-free months can be a lifesaver.   Photo by Muhammad Rizwan  

Look into loan forgiveness programs

Consolidating also gives you the chance to enroll in a loan forgiveness program if you qualify.   The federal government offers four income-based repayment plans that offer loan forgiveness after 20 or 25 years:
  • REPAYE Revised Pay As You Earn
  • PAYE Pay As You Earn
  • IBR Income-Based Repayment
  • ICR Income-Contingent Repayment
  When you are doing your consolidation, you’ll need to research which program might be best for you. Each plan is best suited to specific financial situations.   If you are eligible for forgiveness, you’ll want to choose the plan that offers you the lowest payment. That way, you’ll pay less money before your loan is forgiven.   You might also qualify for other student loan forgiveness plans if you work in certain professions, as follows:
  • The Teacher Loan Forgiveness program will forgive subsidized and unsubsidized Direct Loans up to $17,500 after you teach full-time for five years in a low-income school. Check the directory to see if the school you teach at qualifies.
  • The Public Service Loan Forgiveness program will forgive loans after 10 years of payments if you work for the government or some other nonprofit organization. 

Are there any drawbacks to loan consolidation?

While consolidating offers a lot of benefits, it does have some drawbacks you should consider. Most notably, when you extend the life of your loan to lower your monthly payments, you’ll end up paying more interest in the long-run.   Likewise, if your individual federal student loans had outstanding interest owing, that will become part of the new principal on your consolidated loan. That means you’ll be paying interest on a larger loan (and thus paying more over the course of time).   If you’re already enrolled in the Public Service Loan Forgiveness program, which requires a certain number of scheduled loan payments before you qualify for forgiveness, your clock will be reset by consolidating. In those cases, you’d probably benefit more from keeping those loans as they are.   Still, the benefits of consolidation generally outweigh the disadvantages, especially if you are faced with defaulting. Consolidation is always going to be a better option.   Photo by Mimi Thian

Is it better to refinance than consolidate?

Consolidation through these government programs applies to your federal student loans only. If you have student loans from private lenders, you’ll want to look into refinancing with banks or credit unions. You may be able to bundle your private loans into one at a fixed interest rate.   More >> How student loan consolidation and refinancing differ   In some limited cases, you might benefit from refinancing both your private and federal loans with a private lender. You’ll lose all federal benefits (like any loan forgiveness opportunities), but you may find that a credit union or a bank can give you a lower interest rate.   Refinancing will require a good credit score. If yours has improved significantly (by 50 to 100 points or more) since you received your student loans, you will want to see if a private lender can give you a better interest rate than you currently have on your loans.   If you own a home, and you have good credit, you could take out a home equity loan to pay off school loans. This makes sense if you can get a lower interest rate on your home equity line. Just be mindful of closing costs or other administrative fees that might end up costing you more than if you had simply refinanced the school loans.   If you do refinance with a private lender, be sure to ask three key questions:
  1. Is the interest rate fixed or variable? (If it’s variable, be careful.)
  2. Are there any fees to refinance?
  3. Are there penalties if I pay my loan off early or pay extra in my monthly payments?
    Knowing when to refinance your student loans can be your competitive advantage to paying your loans off quickly. But keep in mind, you don't get one single chance, you can refinance your student loans as many times as you'd like to secure the lower interest rate possible.   More >> Here's exactly why you should refinance your student loans during the coronavirus pandemic  

What if I have bad credit?

Bad credit won’t affect your ability to consolidate federal student loans, but it may exclude you from some of the federal government’s income-driven repayment plans.   However, if you have bad credit and your student loans are from a private lender, you’re going to have a hard time refinancing. One option is to find a cosigner with good credit. If you don’t have a cosigner, you can work on re-establishing good credit and then applying for a refinance when your credit score hits the high 600s.   Photo by NESA by Makers

How do I proceed with consolidating my federal student loans?

If consolidating sounds like a good option for you, it’s easy to get started:
  • Indicate in the form which loans you want to consolidate and those you do not. Remember, you may not want to consolidate loans that qualify for Public Service Loan Forgiveness and for which you’ve already started the clock on repayment.
  • Submit the application and note the contact information for your assigned loan servicer.
  If you have any questions about the loan application as you are doing it, you can call the Student Loan Support Center at 1-800-557-7394. You’ll also be given a loan servicer to help you navigate your consolidation. To get contact information, go to Account and click on “View loan servicer details.”