THE BLOG

Is Federal Loan Consolidation for You?

06/22/2015 01:17 pm ET | Updated Jun 19, 2016

How it Works:

A federal loan consolidation works differently than private loan consolidations. With a federal loan consolidation, all of your eligible federal loans are combined into one loan with a lower monthly payment. Borrowers can consolidate their loans after they graduate, leave school, or drop below half-time enrollment.

A federal student loan consolidation is not a refinance. A federal consolidation is completed through a federal servicer where as a private consolidation can be completed through a platform like Credible. The interest rate on a federal consolidation is calculated by a weighted average of the interest rates on the loans being consolidated. It is rounded to the nearest one-eighth of a percent. There is no cap on the interest of a Federal Direct Consolidation Loan.

Federal Loans Eligible for Consolidation:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • Direct PLUS Loans
  • PLUS Loans from the Federal Family Education Loan (FFEL) Program
  • Supplemental Loans for Students (SLS)
  • Federal Perkins Loans
  • Federal Nursing Loans
  • Health Education Assistance Loans

Benefits of Federal Student Loans Consolidation:

  • It lowers your monthly payment. If your multiple federal loans are adding up to a significantly large payment you can benefit from consolidating your loans into one loan. A federal loan consolidation has more affordable monthly payments and a longer repayment period.
  • It streamlines your finances. You can make one payment for all of your loans to one loan servicer each month. You won’t have to deal with multiple statements each month. Also, you will receive only one 1098-E student loan interest tax form each year.
  • You can keep federal benefits. Benefits such as deferment, forbearance and loan forgiveness programs should transfer over to your new consolidation. Many consolidation loans have their own deferment and forbearance benefits. Check with your loan servicer to see what benefits you will have on your loans. 

Drawbacks of Federal Student Loans Consolidation:

  • Your repayment period may be longer. This can be seen as both a positive or negative depending on your situation. While a longer repayment period means a lower monthly payment, it also means a higher amount of interest over the life of the loan. You will end up paying more interest on your loans since you will be paying them for a longer period of time.
  • Your lower rate loans are now subject to a higher interest rate. On top of paying on your loans for a longer period of time your lower loans will now be subjected to a higher rate. You can no longer direct extra payments to higher interest rate loans to pay those down faster.
  • Some consolidated loans cannot receive federal forgiveness. Not all federal loans are qualified for federal forgiveness. If you combine loans that are eligible for forgiveness with loans that are not, you may lose the opportunity to have those loans forgiven.

Other Alternatives to Consolidating: 

If you are concerned about some of the drawbacks to consolidating your federal loan you might want to consider the following other options.

  • You can take advantage of various repayment programs to make your federal loans more affordable.
  • If you cannot afford to make your monthly payments you may want to apply for the Income Based Repayment plan or the Pay As You Earn Plan. Both programs calculate your monthly payments based on your income and have some loan forgiveness features.
  • You may also be able to put your federal loans into deferment or forbearance for various health, financial and service oriented reasons.
  • Consider private loan consolidation if you would like to lower your interest rates as well as have the convenience of one monthly payment.

Check out Credible’s unique student loan consolidation marketplace to compare lenders and get the best offer possible.