Benefits of Consolidation
Combines multiple loans into one to simplify loan repayment
If you have multiple federal student loans, and especially if your loans have different loan servicers, consolidating your loans into one Direct Consolidation Loan will simplify the process of managing your student loans. You’ll have a single loan with just one monthly bill, and only one servicer to deal with. And if you have an older student loan with a variable interest rate, consolidation will lock in a fixed interest rate.
Borrowers with FFEL and Perkins Loans can replace them with a Direct Loan that is eligible for more plans and benefits
Consolidating your FFEL or Perkins Loans will replace these older loan types with a new loan in the Direct Consolidation Loan. That means you’ll get the benefit of new programs that are rolled out to help student loan borrowers manage their loans, which FFEL and Perkins loans are often excluded from. For example, new limits to reduce interest capitalization starting July 1 will only apply to Direct Loans, and the payment pause only applied to Direct Loans and other loans held by the Department of Education.
Consolidating your FFEL or Perkins Loans can give you access to more income-driven repayment (IDR) plans that could lower your monthly payments. Under an IDR plan, your monthly payment could be as low as $0 per month and could earn you credit toward IDR or Public Service Loan Forgiveness (PSLF).
Consolidating your FFEL or Perkins Loans can make you eligible for Public Service Loan Forgiveness (PSLF).
Borrowers with Parent PLUS loans can consolidate to access the income-contingent repayment (ICR) plan
Parent PLUS Loans are not eligible for IDR plans unless you first consolidate into a Direct Consolidation Loan. Consolidating allows you to sign up for the income-contingent repayment (ICR) plan. For more information, see our page on income-driven repayment (IDR).
Consolidate to take advantage of the one-time IDR account adjustment!
If you have federal student loans that are not held by the Department of Education, such as Perkins Loans and certain FFEL and HEAL loans, you can consolidate those loans together into a new Direct Consolidation Loan to make those loans eligible for the one-time IDR account adjustment. This is big news because it means that you may be able to get credit for all of your time in repayment, in the payment pause, and even time in some deferments or forbearances toward PSLF and IDR loan forgiveness. This could put you years closer to being debt-free.
If you work in public service or want to have your loans forgiven after 20-25 years of payment (or even as soon as 10 years of payments), don’t miss out on this time-limited opportunity. You have to apply for consolidation before June 30, 2024 to qualify, and you may want to leave certain loans (such as Direct Loans and Parent PLUS loans) out of your consolidation to avoid losing benefits (see more about this below). For more information about this program, see the Department of Education’s website and on our page on the one-time IDR account adjustment.
Downsides of Consolidation
Potentially longer repayment period
Consolidating your loans may increase the number of years in your payment plan if you are paying in the Standard or Graduated plans—from 10 years up to as many as 30 years. And if your payment period in the Standard Plan is more than 10 years, then those payments will not count towards PSLF or IDR loan forgiveness. But if you are paying in an IDR plan, consolidation should not impact the length of your payment plan or hurt your eligibility toward PSLF or IDR loan forgiveness.
You may pay more interest over time
If your repayment period is longer because of consolidation, you are likely to pay more interest over time.
When you consolidate your loans, any outstanding interest on the loans you consolidate becomes part of the original principal balance on your consolidation loan. That means that interest may accrue on a higher principal balance than if you had not consolidated, leading you to pay more interest over time.
Consolidation may slightly increase your interest rate, but the change should be minor. Your new interest rate is the weighted average of the interest rates of the loans you consolidate, rounded up to the nearest one-eighth of a percent.
If you consolidate loans with different interest rates, you won’t be able to pay off your higher interest-rate loans faster by making additional payments on those loans. This is a strategy some borrowers find useful to reduce the amount of interest they pay.
You might lose certain benefits and options
If you consolidate all of your loans into a single Direct Consolidation Loan, then you will not be able to use consolidation to get out of default if you default in the future.
If you have a Perkins Loan and you work in a field that would make you eligible for Perkins Loan cancellation, you may not want to include your Perkins Loans when you consolidate. For more information, see our page on loan cancellation and forgiveness options.
Consolidating certain types of loans together can limit your eligibility for some programs
If you have both federal loans that are held by the federal government (like Direct Loans) and loans that are not held by the federal government (like most Perkins Loans and some FFEL loans), then consolidating them together now will make you ineligible for President Biden’s plan for up to $20,000 in debt relief. If you want to still be eligible for loan cancellation under President Biden’s relief plan, you can consolidate your non-federally held loans together but leave out your federally-held loans for now, or consolidate them separately.
If you consolidate your current Direct Loans with other loans into a new Direct Consolidation Loan, you may lose certain benefits on those Direct Loans, such as access to certain IDR plans or loan cancellation, by combining them with the new Direct Consolidation Loan.
For example, you usually don’t want to combine Parent PLUS loans with any other type of loan, because consolidating them together could mean that you will only be eligible for an Income-Contingent Repayment (ICR) plan, which is usually more expensive than other IDR plans. You can consolidate your Parent PLUS loan and your other types of loans separately to avoid this risk.
You can use the Department of Education’s Loan Simulator Tool to help you figure out your repayment options and decide if you want to consolidate these loans.
