What is Student Loan Consolidation?

Student loan consolidation allows you to combine multiple federal student loans into a new Federal Direct Consolidation Loan. (Private loans can only be refinanced, not consolidated.)

Consolidating a loan allows you to:

• Choose a new loan servicer

• Qualify for income-driven repayment plans

• Streamline your debt to a single monthly payment

• Stretch your loan repayment period up to a 30-year term

• Maintain or obtain eligibility for federal student loan forgiveness programs

Let’s talk about what student loan consolidation means for you and answer the FAQs I hear as a student loan lawyer. If you still have questions, you may want to talk to an expert who can give you personalized legal advice.

What are the benefits of student loan consolidation? The benefits of student loan consolidation are:

• qualify for loan forgiveness programs

• lower monthly payments

• get out of default

Benefit 1: Qualify for Loan Forgiveness Programs

Only Direct Loans qualify for the Public Service Loan Forgiveness Program. Loans made under the Federal Family Education Loan Program (FFEL) and Federal Perkins Loan Program do not meet the eligibility requirements for the PSLF Program.

However, you can make them eligible by consolidating them into a Direct Consolidation Loan.

Can my student loans be forgiven if I consolidate? Yes, your federal student loans can be forgiven if you consolidate them. In fact, some of your student loans can only be forgiven if you consolidate.

Benefit 2: Lower Monthly Payments

Most Direct Consolidation Loans are eligible for enrollment in all income-driven repayment plans (IDR plans), such as:

• Pay As You Earn (PAYE)

• Revised Pay As You Earn (REPAYE)

• Income-Based Repayment (IBR)

• Income-Contingent Repayment (ICR)

IDR plans can lower your monthly student loan payments by factoring in your income and family size.

FFELP, Perkins Loans, and Parent Plus Loans aren’t eligible for some or all of the IDR plans.

With one exception, consolidating those loans makes you eligible for the income-driven repayment plan that gives you the lowest monthly payment: the Revised Pay As You Earn Plan.

The exception: Consolidation loans that include a Parent Plus loan are, however, ineligible for the REPAYE Plan. Those types of consolidation loans are eligible only for the income-contingent repayment plan, which could bottom out at a $0 monthly payment for large, low-income families.

Benefit 3: Get Out of Default

Consolidation gets your defaulted student loan debt out of default in about 2-3 months. The new consolidation loan pays off the principal, interest, and collection fees owed on the loans included in the consolidation.

There’s no way to get the collection fees waived if you consolidate.

If you’re interested in waiving your collection fees, check out federal student loan settlements or the loan rehabilitation program.

However, student loan consolidation isn’t suitable for everyone. Here are what I see as the primary downsides to student loan consolidation:

• more interest paid in the long-term

• lost credit towards loan forgiveness

While you can consolidate to lower your monthly payments, don’t consolidate your federal student loans to get a lower fixed-rate loan. Federal student loan consolidation does not give you a lower interest rate.

Downside 1: More Interest Paid in the Long Term

The main downside to consolidating federal student loans is that you likely pay more interest over the long run. You’ll pay more overall for 3 reasons:

1. Consolidation extends your loan term. The longer the loan repayment term, the more interest you’ll pay over time.

2. Any outstanding interest on the loans that you consolidate becomes part of your consolidation loan’s original principal loan balance. As a result, interest will accrue on a higher principal loan balance than if you had not consolidated.

3. Your consolidation loan will feature a weighted average interest rate, rounded up to the nearest one-eighth of a percent. This rounded-up average may only cost you a couple hundred dollars, depending on your loan amount, but it does increase your interest.

Downside 2: Lost Credit Towards Loan Forgiveness

Consolidating your current loans into a single loan will cause you to lose credit for any qualifying payments made toward income-driven repayment plan forgiveness or Public Service Loan Forgiveness.

You don’t need to include all of your eligible loans in your loan consolidation. For example, if you’ve earned credit towards loan forgiveness on two loans, consider leaving those loans out of your consolidation application.

Which student loans are eligible for consolidation? Most federal student loans are eligible for consolidation:

• Federal Stafford Loans (Unsubsidized and Subsidized)

• Parent Loans for Undergraduate Students

• Federal Family Education Loan (FFEL) Program Loans

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

• Federal Perkins Loans

• Direct Subsidized Loans

• Direct Unsubsidized Loans

• Direct PLUS Loans (Parent Plus and Graduate Plus)

• Federal Insured Student Loans

• Guaranteed Student Loans

• National Direct Student Loans

• National Defense Student Loans

• Nursing Student Loans

• Nurse Faculty Loans

• Health Education Assistance Loans

• Health Professions Student Loans

• Loans for Disadvantaged Students

• Supplemental Loans for Students

• Auxiliary Loans to Assist Students

Private loans are ineligible for student loan consolidation. (That would be a situation for refinancing, discussed later in this post.)

Also, if you have a FFEL Consolidation Loan, you’re allowed to consolidate once more into a Direct Consolidation Loan.

No, it does not cost money to consolidate federal student loans. There are no loan origination fees for consolidation loans or the application process. The federal government lets borrowers consolidate federal education loans for free at studentaid.gov.

You can also submit a paper loan application to a loan servicer of your choosing.

The following PDFs can be completed online or printed out and completed by pen:

• Federal Direct Consolidation Loan Application

• Request to Add More Loans to Consolidation

Beware: Predatory companies promise to help you consolidate your loans and get the best rate possible for an upfront fee. Never accept help from a company asking for payment to help you consolidate your student loans.

The process of applying for student loan consolidation is actually reasonably straightforward. Just follow these steps:

1. Begin consolidating federal student loans for free by heading to studentaid.gov.

2. Use your Federal Student Aid ID to log in.

3. To apply online, click Manage Loans>Consolidate My Loans>Start. (See screengrab below.) You can also submit a paper application to a loan servicer of your choosing by mail or fax. Student loan borrowers whose loans are in default may use the collection agency that has their loans to start the consolidation process.

The Department of Education does not charge federal student loan borrowers an application fee for loan consolidation. You should be able to apply for $0.

The student loan consolidation process typically takes 30-60 days from start to finish. Consolidation can finish quicker if you waive the 10 business day waiting period after receiving your Loan Summary Statement.

It usually takes longer if you don’t respond to requests from your student loan servicer. The main reason I see consolidations take longer is due to missing income information.

To avoid delays, contact the loan servicer a few days after submitting your consolidation application to confirm they’ve received all necessary documents.

How many times can you consolidate student loans? You can consolidate student loans more than once if you have another federal student loan to consolidate it with.

You can consolidate student loans more than once in these unique situations:

• you can consolidate an FFEL Consolidation Loan by itself into a Direct Consolidation Loan

• you can consolidate an FFEL Consolidation with another federal student loan into a new Direct Consolidation Loan

• you can consolidate a Direct Consolidation Loan with another federal student loan into a new Direct Consolidation Loan

While you can consolidate an FFEL Consolidation Loan by itself, you cannot consolidate a Direct Consolidation Loan by itself. You have to have another loan to combine the Direct loan with.

Borrowers with an FFELP Consolidation Loan can apply for a Direct Consolidation Loan even if they don’t have a second federal student loan to pair with the FFEL Loan.

The interest rate on consolidated student loans is the weighted average of the interest rates of the loans included in the consolidation, rounded up to the next one-eighth of one percentage point. Loans with larger balances factor more significantly into your overall interest rate.

Do not consolidate your student loans simply to get a better interest rate — that won’t happen. The upside is that you will get a fixed interest rate.

Your new Direct Consolidation Loan will have a fixed interest rate for the life of the loan. This may prevent any of your student loans’ variable interest rates from rising in the future.

Consolidating your federal student loans shouldn’t hurt your credit score long-term. Unlike debt consolidation for credit cards, medical bills, etc., the U.S. Department of Education doesn’t check your credit history to approve your application.

Once your application is approved, your loan servicer will contact the credit bureaus to:

• Request the loans included in your consolidation be reported as “paid in full through consolidation”

• Add the new consolidation loan to your credit report as an installment loan

Some of my clients have reported a temporary drop in their credit scores during the Direct Loan Consolidation process. However, they said their score increased shortly after that.

Related: Does Student Loan Consolidation Affect Your Credit Score?

You don’t need a specific credit score to consolidate federal student loans with the U.S. Department of Education. The Department of Education doesn’t run a credit check before it approves your loan application.

Refinancing your federal student loans with a private lender is different.

Private lenders require a good credit score (minimum credit score of 650-680) to approve student loan refinancing applications.

Also, depending on your credit score, you may need a cosigner for your private consolidation loan.

You can’t “consolidate” federal student loans into private loans. However, you can essentially do that same thing by refinancing your federal loans into private loans. It’s important to note that if you do this, you lose federal student loan benefits.

Refinance loans are private loans that pay off some or all of your student loans. Then you’ve got a single loan to pay off with a potentially lower interest rate.

You can refinance federal, private, or a combination of federal and private loans. You can only consolidate federal loans. Refinancing might offer you a better interest rate, while consolidation will essentially never lower your interest rate.

Here are a few trusted companies that can help you refinance your student loans:

• SoFi

• LendKey

• CommonBond

• SoFi

• LendKey

• CommonBond

You cannot use the Department of Education to consolidate federal student loans with private student loans. You cannot “transfer” private student loans to federal student loans.

You can, however, combine your federal student loans with your private student loans by refinancing with a private lender.

From here, there’s no reversing the process. It’s impossible to return a federal student loan you refinanced with a private lender back into a federal student loan. Federal loans typically come with more flexibility than private loans.

You could consider refinancing your federal student loans with a private loan, but only if you have a stable, reliable income that allows you to aggressively pay towards your student loan debt.

Typically, borrowers refinance with a private lender to get a lower interest rate. That low interest rate is usually a variable interest rate that rises and drops.

Therefore, it may make sense to refinance if you can pay off your student loan debt before the variable interest rate increases drastically.

Pros to refinancing federal student loans into private loans:

• You could get a lower interest rate. However, it’s often a variable rate, so it will almost certainly rise with time.

• You likely extend the loan term and monthly payments.

• You may be able to release a cosigner from the original loan.

Cons to refinancing federal student loans to private loans:

• You lose access to deferment and forbearance options.

• You lose eligibility for student loan repayment options based on your income.

• You lose eligibility for loan forgiveness programs like the Public Service Loan Forgiveness. You also become ineligible if the government forgives $10,000+ in federal student loan debt.

• You may lose eligibility to discharge student loan debt due to Total and Permanent Disability.

• You may have to pay loan origination fees.

• You may be required to provide a cosigner.

Yes, you can refinance your student loan debt after you consolidate it. You will need to find a private lender willing to refinance your Direct Consolidation Loan.

Typically, you’ll need a good credit score (680+) and a solid income to qualify for a lower interest rate.

Important: Refinancing a federal student loan with a private lender causes you to lose certain benefits like student loan forgiveness, income-driven repayment, deferment opportunities, etc.

Whether you’re consolidating your student loans or refinancing), it may be helpful to talk to an expert. Schedule a call with me. I’m a student loan lawyer with years of experience and dozens of success stories.