How Does Consolidating Student Loans Work

Last Updated on May 19, 2022

Consolidating student loans can be a great way to pay off your debt and save money. But it’s not the right choice for everyone.

The first thing you need to know about consolidating student loans is that it’s not a one-size-fits-all solution. There are many different types of student loans, and each type comes with its own set of benefits and drawbacks. So before we talk about how consolidating student loans works, let’s take a look at how each type of loan works so you can decide which one is best for your situation.

Federal Loans

Federal loans are government-backed student loans that have fixed interest rates and generous repayment plans. Federal loans come in two forms: subsidized and unsubsidized. If you qualify for a subsidized loan, there’s no interest charged while you’re enrolled in school; if not, interest starts accruing right away (though you do have options for deferring payments until after graduation). The biggest benefit of federal loans is that they offer flexible repayment plans—your monthly payment amount will depend on how much money you make each month—and most federal loan holders have access to Public Service Loan Forgiveness (PSLF), which allows them

5 Things to Know Before Consolidating Federal Student Loans – Federal  Student Aid

How Does Consolidating Student Loans Work

A Direct Consolidation Loan allows you to consolidate (combine) multiple federal education loans into one loan. The result is a single monthly payment instead of multiple payments. Loan consolidation can also give you access to additional loan repayment plans and forgiveness programs.

Should I consolidate my loans?
The answer depends on your individual circumstances.


If you currently have federal student loans that are with different loan servicers, consolidation can greatly simplify loan repayment by giving you a single loan with just one monthly bill.

Consolidation can lower your monthly payment by giving you a longer period of time (up to 30 years) to repay your loans.

If you consolidate loans other than Direct Loans, consolidation may give you access to additional income-driven repayment plan options and Public Service Loan Forgiveness (PSLF). (Direct Loans are from the William D. Ford Federal Direct Loan Program.)

You’ll be able to switch any variable-rate loans you have to a fixed interest rate.


Because consolidation usually increases the period of time you have to repay your loans, you will likely make more payments and pay more in interest than would be the case if you didn’t consolidate.

When you consolidate your loans, any outstanding interest on the loans that you consolidate becomes part of the original principal balance on your consolidation loan, which means that interest may accrue on a higher principal balance than might have been the case if you had not consolidated.

Consolidation may also cause you to lose certain borrower benefits—such as interest rate discounts, principal rebates, or some loan cancellation benefits—that are associated with your current loans.

If you’re paying your current loans under an income-driven repayment plan, consolidating those loans will cause you to lose credit for any payments made toward income-driven repayment plan forgiveness.

If consolidation would cause you to lose the benefits associated with some of your current loans and you are working toward earning those benefits, you should not include those loans in your new Direct Consolidation Loan. When you apply for a Direct Consolidation Loan, you don’t have to consolidate all of your eligible loans.

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.

If you want to lower your monthly payment amount but are concerned about the impact of loan consolidation, you might want to consider deferment or forbearance as options for short-term payment relief, or consider switching to an income-driven repayment plan for longer-term payment relief.

Once your loans are combined into a Direct Consolidation Loan, they cannot be removed. The loans that were consolidated are paid off and no longer exist.

What types of loans can be consolidated?
Most federal student loans, including the following, are eligible for consolidation:

Subsidized Federal Stafford Loans

Unsubsidized and Nonsubsidized Federal Stafford Loans

PLUS loans from the Federal Family Education Loan (FFEL) Program

Supplemental Loans for Students

Federal Perkins Loans

Nursing Student Loans

Nurse Faculty Loans

Health Education Assistance Loans

Health Professions Student Loans

Loans for Disadvantaged Students

Direct Subsidized Loans

Direct Unsubsidized Loans

Direct PLUS Loans

FFEL Consolidation Loans and Direct Consolidation Loans (only under certain conditions)

Federal Insured Student Loans

Guaranteed Student Loans

National Direct Student Loans

National Defense Student Loans

Parent Loans for Undergraduate Students

Auxiliary Loans to Assist Students

Private education loans are not eligible for consolidation, but for some Direct Consolidation Loan repayment plans, the total amount of your education loan debt—including any private education loans—determines how long you have to repay your Direct Consolidation Loan.

Direct PLUS Loans received by parents to help pay for a dependent student’s education cannot be consolidated together with federal student loans that the student received.

When can I consolidate my loans?
Generally, you are eligible to consolidate after you graduate, leave school, or drop below half-time enrollment.

What are the requirements to consolidate a loan?
Here are some of the eligibility requirements for receiving a Direct Consolidation Loan:

The loans you consolidate must be in repayment or in the grace period.

Generally, you cannot consolidate an existing consolidation loan unless you include an additional eligible loan in the consolidation.

Under certain circumstances, you may reconsolidate an existing FFEL Consolidation Loan without including any additional 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 you must agree to repay your new Direct Consolidation Loan under the
Income-Based Repayment Plan,
Pay As You Earn Repayment Plan,
Revised Pay As You Earn Repayment Plan, or
Income-Contingent Repayment Plan.

If you want to consolidate a defaulted loan that is being collected through garnishment of your wages, or that is being collected in accordance with a court order after a judgment was obtained against you, you cannot consolidate the loan unless the wage garnishment order has been lifted or the judgment has been vacated.

*You may be able to reconsolidate an existing

delinquent or defaulted FFEL Consolidation Loan and repay your new Direct Consolidation Loan under an income-driven repayment plan;

FFEL Consolidation Loan in order to qualify for the PSLF Program; or

FFEL Consolidation Loan to use the no accrual of interest benefit for active duty service members, which states that you’re not required to pay the interest that accrues during periods of qualifying active duty military service (for up to 60 months) on the portion of a Direct Consolidation Loan that repaid a Direct Loan Program or FFEL Program loan first disbursed on or after Oct. 1, 2008.

What is the interest rate on a consolidation loan?
A Direct Consolidation Loan has a fixed interest rate for the life of the loan. The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of one percent. There is no cap on the interest rate of a Direct Consolidation Loan.

When do I begin repayment?
Repayment of a Direct Consolidation Loan will begin within 60 days after the loan is disbursed (paid out). Your loan servicer will let you know when the first payment is due.

If any of the loans you want to consolidate are still in the grace period, you have the option of indicating on your Direct Consolidation Loan application that you want the servicer that is processing your application to delay the consolidation of your loans until closer to the grace period end date. If you select this option, you won’t have to begin making payments on your new Direct Consolidation Loan until closer to the end of the grace period on your current loans.

Are there different repayment plans?
Borrowers have different needs, so there are several repayment plans—including income-driven repayment plans, which base your monthly payment amount on your income and family size. You’ll select a repayment plan when you apply for a Direct Consolidation Loan. Learn about repayment plans.

How do I apply for a Direct Consolidation Loan?
Apply for a Direct Consolidation Loan. You can complete and submit the application online, or you can download and print a paper application for submission by U.S. mail.

After you submit your application electronically or by mailing a paper application, the consolidation servicer you selected will complete the actions required to consolidate your eligible loans. The consolidation servicer will be your point of contact for any questions you may have related to your consolidation application.

Unless the loans you want to consolidate are in a deferment, forbearance, or grace period, it’s important for you to continue making payments on those loans until your consolidation servicer tells you that they have been paid off by your new Direct Consolidation Loan.

disadvantages of consolidating student loans

While consolidating can be a useful tool, there are still some drawbacks to be aware of before making the decision:

  • Pay more interest over time: Choosing to pay off your loan over 30 years will lower your monthly payment but cost you more in interest over time. You’ll also be in debt for a longer period of time, which could impact other parts of your finances.
  • No lower interest rate: The primary draw of refinancing is that you can often find a lower interest rate than what you’re currently paying. With consolidation, your interest rate is calculated as the weighted-average interest rate of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. Because of this, your interest rate could be slightly higher than what you’re currently paying.
  • Lose progress toward federal forgiveness programs: Consolidating your loans could cause you lose progress you’ve made on federal programs like PSLF or an existing income-driven repayment plan.
  • Interest is added to your balance: If you have any unpaid interest on the loans that you’re consolidating, that interest will be added to your principal balance when you consolidate. Interest will then accrue on this higher balance.

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