Post-college life

What is student loan consolidation?

Student loan borrowers often find themselves stuck making multiple monthly payments toward their loans. They may be responsible for paying several lenders every month, leading to lots of confusion and missed payments that can affect stress levels—as well as credit score.


Fortunately, the U.S. government offers a convenient student loan consolidation program that may help you make your monthly student loan payments more organized.


What is student loan consolidation?


The U.S. government offers what’s called a Direct Consolidation Loan that allows you to combine all your federal student loans into one loan. The consolidated loan pays off all your federal loans, leaving you with one simple bill to be paid every month.


Taking out a Direct Consolidation Loan means that you will be making one monthly payment instead of several that can quickly become difficult to manage. With just one payment per month, you’ll be able to treat your student loans the same as you would any other monthly household bill.


Why should I consider consolidating my student loans?


There are several benefits to consolidating your federal student loans under the Direct Consolidation Loan program.


  1. Consolidating your federal student loans may be worth the effort if you are paying two or more loan servicers. Having to remember to write several checks per month can lead to missed payments.
  2. With a Direct Consolidation Loan, not only are you able to make one monthly payment, but you may be able to lower the payment by stretching your repayment period up to 30 years.
  3. All federal loans are eligible for a fixed interest rate once consolidation has taken place. Loans with variable rates have the tendency to increase once the economy becomes unstable. If you lose your job or your salary decreases, you risk not making your monthly payments as promised with little recourse.
  4. If you have non-Direct Loans and consolidate them, you may become eligible for income-based repayment.


While signing up for loan consolidation may sound like a great plan initially, it should be weighed against several considerations before you make your final decision.


  1. While consolidating your loans can increase the repayment period, it also means that you will be making more payments and paying more in interest overall.
  2. Once consolidation has occurred, all unpaid interest is added to the loan principal. This means that you can expect to pay a higher balance.
  3. You can may lose access to some benefits once your loans have been consolidated. These benefits can include discounts on interest rates, principal rebates, or loan cancellation perks.
  4. If you currently are paying your loans through an income-based repayment plan or you have made qualifying payments toward Public Service Loan Forgiveness, consolidation will erase your progress so far, causing you to start the path to forgiveness over again.


Fortunately, you are not forced to consolidate all your loans when participating in the Direct Consolidation Loan program. For example, if you are working in an occupation that allows you to cancel your Perkins loans after a number of years of service, then you should not include your Perkins loans in your student loan consolidation.


What loans can I consolidate under the Direct Consolidation Loan program?


There are a number of federal loans that are eligible for consolidation under the Direct Consolidation Loan program. These include the following:

  • Subsidized Federal Stafford/Direct Loans
  • Unsubsidized Federal Stafford/Direct 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 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

There is one federal loan that does not qualify for the Direct Consolidation Loan program—the Direct PLUS Loan for parents. This cannot be combined with federal loans taken out by the student to be included in a consolidated loan.


What should I know before I start the loan consolidation process?


Your federal loans are eligible for consolidation after graduation, after you leave school, or once you drop below half-time enrollment. In order to be considered for participation in the federal loan consolidation program, your loans must be in repayment or still be under the six-month grace period.


Your Direct Consolidation Loan will have a fixed interest rate for the entire life of the loan. The fixed rate is calculated as the average of the interest rates on your current loans being included in the consolidation, rounded up to the nearest one-eighth of a percent. There is no limit on the interest rate of your Direct Consolidation Loan.


Once you have signed up for a Direct Consolidation Loan, you will have 60 days after your loans are paid before your first monthly payment is due. If any of your federal loans are still in their grace period, you are able to indicate on your loan application that they should delay the processing of your application until the grace period is complete. This option will allow you until the grace period is officially over to pay your new Direct Consolidation Loan.


What if one or more of my federal loans are in default?


If one or more of your loans are in default, you must make a minimum of three consecutive monthly payments on those loans before you will be allowed to consolidate.


You can also opt to repay the new Direct Consolidation Loan under the Income-Based Repayment Plan, Pay as You Earn Repayment Plan, Revised Pay as You Earn Repayment Plan, or the Income-Contingent Repayment Plan. These are special repayment plans that adjust your payment based on your income and cost of living.


If you are currently paying a defaulted loan through garnished wages at your place of employment, or via a court order, you are not eligible for federal loan consolidation until the order for wage garnishment or judgment has been lifted.


How do I apply for a Direct Consolidation Loan?


There are two ways to apply for a Direct Consolidation Loan:

  1. Apply online at
  2. Download and print a paper application on and send via mail

Once you have submitted the application, your consolidation servicer will begin the process to consolidate your eligible loans. Remember that you must continue to make payments on your loans until you have been notified by your consolidation servicer that your existing loans have been paid off by your new Direct Consolidation Loan.


What’s the difference between loan consolidation and loan refinancing?


Consolidation and loan refinancing are terms that often get confused when talking about student debt repayment.


Refinancing allows the borrower to get a new loan with a new interest rate that is hopefully better than what they had before. Private lenders use your credit score and income to determine the new interest rate. Private lenders are also able to consolidate both federal and private loans, while the Direct Consolidation Loan program only allows federal loans to be considered.


How can I use student loan consolidation to increase my credit score?


We’ve all heard that making on-time monthly payments on your student loans can help to improve your credit score. However, student loan borrowers may not know how consolidating your loans can contribute to the process.


Having several student loan bills to pay every month has the potential to lead to missed payments since there’s so much to keep organized. Pulling all those loans into one, with one monthly payment, will make it easier to make your payments on time.


Taking the steps to consolidate your federal student loans via the Direct Consolidation Loan program is a smart way to make repaying your loans a lot easier to manage. If your priority is to lower your interest rate, though, or you have a combination of federal and private loans, then refinancing may be a better option for you. Once you consider your circumstances, you can make the right decision for your situation.

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