Loan Consolidation allows you to combine one or multiple federal education loans into a new Direct Consolidation Loan for the purpose of lowering your monthly payment amount or to gain access to federal forgiveness programs.
Consolidation v. Refinancing
Generally, refinancing student loans involves a private lender. Borrowers can refinance both federal and private student loans, however, when refinancing a federal student loan, the federal student loan is converted into a private student loan leading to the loss of benefits that come with federal student loans. Once federal student loans are refinanced into private student loans, a borrower cannot convert it back into a federal student loan. In contrast, student loan consolidation is only available for federal student loan borrowers.
Benefits of Loan Consolidation
One Monthly Bill: You can simplify your loan repayment by consolidating your loans into one single loan with just one monthly bill. This is especially true if you have federal student loan that are serviced by different loan servicers.
Lower Monthly Payment: Consolidation may lower a monthly payment by providing borrowers access to additional Income-Driven Repayment (IDR) plans or by giving the borrower more time to repay their loan (up to 30 years).
Access to Forgiveness Options: If you have loans other than Direct Loans, such as FFEL Program loans, or Federal Perkins loans, then consolidating them into Direct Consolidation Loans may give you access to forgiveness options such as Income-Driven Repayment (IDR) forgiveness or Public Service Loan Forgiveness (PSLF).
Access to Income-Driven Repayment (IDR) Plans: If you consolidate loans other than Direct Loans—such as FFEL Program loans or Federal Perkins loans—consolidation may give you access to additional income-driven repayment (IDR) plan options, which can lower your monthly payment amount.
Fixed Interest Rate: Consolidating gives the borrower the ability to switch any variable-rate loans to a fixed interest rate. A Direct Consolidation Loan has a fixed interest rate for the life of the loan. The fixed interest rate will be the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of one percent.
Disadvantages of Loan Consolidation
Longer Repayment Period: Repaying a new consolidation loan on a Standard or Graduated plan can increase the period of time a borrower will repay their loan, resulting in more payments and more interest overall than if they would not have consolidated.
More Interest: Outstanding interest is capitalized when you consolidate student loans, which means that the outstanding interest becomes part of the original principal balance. This would lead to interest accruing on a higher principal balance and the borrower paying more interest over the life of the loan.
Loss of Certain Borrower Benefits: It is important to understand that consolidating could cause a borrower to lose certain benefits if consolidating the wrong loans. Consolidating certain Direct Loans may lead to the loss of borrower benefits, such as interest rate discounts, principal rebates, or some loan cancellation benefits that are associating with current loans. If consolidating could lead to the loss of certain benefits, then you should not include those loans when applying for consolidation.
Consolidating Direct Parent PLUS Loans with Other Loans
If you have both Direct PLUS loans for parents for a dependent's education and other eligible loans for your own education, consolidating them together could result in losing access to certain repayment plans for loans for your own education. You can also use Loan Simulator to model your repayment options if you consolidate these loans together.
To maximize your repayment plan options, you should not include both parent PLUS loans and loans for a dependent’s education in the same Direct Consolidation Loan. You can consolidate both types of loans separately to avoid this risk.
For example, if you have Federal Perkins Loans and you are employed in an occupation that would qualify you for Perkins Loan cancellation benefits, you may not want to include your Perkins Loans when you consolidate. Leaving out your Perkins Loans will preserve the benefits on those loans.
Eligibility
- Most federal student loans are eligible for consolidation.
- Private Student loans are not eligible for consolidation.
- Parent PLUS Loans to help pay for a dependents student’s education cannot be consolidated with a federal loan that the student received.
- You can consolidate your federal student loans into a new Direct Consolidation Loan if you are incarcerated, as long as you are not a student at the time of consolidation.
- Borrowers are eligible to consolidate after graduation, leaving school or dropping below half-time enrollment.
- Certain defaulted loans are eligible for consolidation.
Consolidating Defaulted Loans
If you want to consolidate a defaulted loan, you must either:
- make satisfactory repayment arrangements (defined as three consecutive monthly payments) on the loan before you consolidate; or
- agree to repay your new Direct Consolidation Loan under an income-driven repayment plan.
A defaulted loan that is being collected through wage garnishment or that is being collected in accordance with a court order after a judgement has been obtained cannot be consolidated unless the wage garnishment or has been lifted or the judgement has been vacated.
Joint Consolidation Loan Separation Act
On Oct. 11, 2022, the Joint Consolidation Loan Separation Act was signed into law to allow joint consolidation loan borrowers to separate their joint loan obligations into new individual Direct Consolidation Loans. There are two ways to apply:
Joint Application: The Joint Application option requires each joint consolidation co-borrower to request separation of the joint debt into new, individual Direct Consolidation Loans by completing and submitting an Application/Promissory Note that is used only for this purpose. The separation of the joint consolidation loan and creation of two new, individual Direct Consolidation Loans will not proceed unless completed applications have been received from both co-borrowers.
Separate Application: The separate application process allows just one of the joint consolidation loan co-borrowers to apply for separation of the joint debt, without regard to whether or when the other co-borrower applies to separate the debt. In this situation, the borrower who applies to separate the joint debt will have their portion of the debt converted into a Direct Consolidation Loan. The co-borrower who did not apply to separate will continue to be responsible for the original joint consolidation loan with a remaining balance equal to that borrower’s portion of the remaining balance. The non-applicant will be notified of the separation application and of their ability to submit an Application/Promissory Note to separate and receive a new individual Direct Consolidation Loan.
However, under the Joint Consolidation Loan Separation Act, a separate application is permitted only if the individual coborrower applying certifies that they have been a victim of domestic violence by the other borrower, have experienced economic abuse from the other borrower, or are unable to reasonably access the other borrower’s loan information, or if the federal government determines it would be in the best interest of the federal government to permit separate application.
Applying for Joint Consolidation Loan Separation: Applications can be sent to either: ED_Consolidation_Orig@aidvantage.studentaid.gov noting their desired final servicer or to one of the addresses listed in the application.
Applying for Loan Consolidation
Visit Studentaid.gov/loan-consolidation/
The electronic application process can take less than 30 minutes. Borrowers can apply online or by U.S. postal mail. You can apply for consolidation by clicking here.
After you submit your application, a loan servicer will manage the consolidation process and will be your point of contact during this process. This servicer may not be the same one that you selected on your consolidation application, however, ultimately you will be working with your selected servicer once the consolidation is complete.
Still Have Questions?
Contact the Student Loan Ombudsman directly here.