Guide to Student Loan Consolidation
Direct consolidated loans make up 31.6% of federal student loan debt, according to the Education Data Initiative. Consolidation is becoming increasingly popular for borrowers nationwide as consolidating combines multiple loans into one convenient monthly payment. Additionally, for many borrowers, consolidating can create eligibility for federal Income-Driven Repayment and forgiveness programs.
Let’s look at what student loan consolidation is and how it could help you minimize your monthly costs, reduce your overall debt burden, and get back on track with repayment.
What is student loan consolidation?
Student loan consolidation is a financial strategy that allows borrowers to combine multiple existing loans into one, often resulting in a single monthly payment with a potentially lower interest rate.
Consolidating generally refers to federal student loans and can only be done through the Direct Loan Program or the Department of Education.
By turning other types of loans into Direct Loans (a loan issued directly by the U.S. Department of Education), consolidation can also offer additional benefits, such as access to Income-Driven Repayment and forgiveness programs.
How to decide if consolidation is right for you
To help you make an informed decision in choosing consolidation, it’s important to understand two important steps: understanding your financial situation and qualifying for the loan.
Understand your budget
Before proceeding with consolidation, it’s imperative to know your financial situation, which includes creating a comprehensive budget. Consider the following steps:
- List out your income: Start by cataloging all sources of income, including your employment, freelance work, and any additional revenue streams.
- Track your expenses: Document all expenses, from rent or mortgage payments to groceries, transportation, and entertainment.
- Identify discretionary spending: Recognize “bonus” spending — areas in which you can reduce discretionary spending, such as dining out less frequently or discontinuing unnecessary subscriptions.
- Build an emergency fund: Ensure you have an emergency fund in place to provide a financial cushion for unexpected expenses.
- Budgeting tools: Utilize budgeting tools or apps to streamline the process. Many apps offer features like expense tracking and budgeting.
A well-structured budget can offer a clearer view of your financial position, enabling you to assess how consolidation may affect your monthly finances. Consider our 50/30/20 budgeting worksheet to help you get started.
Qualify for a consolidation loan
You can qualify for federal student loan consolidation once you graduate or leave school, or if your enrollment drops below half-time. Your loans must be in repayment or in a grace period — and in good standing.
For borrowers pursuing Income-Driven Repayment (IDR) plans, consolidating could be a strategic move. After consolidation and enrolling in IDR, your loan servicer calculates your monthly payments based on your family size and income, potentially reducing your monthly amount.
Most federal student loan borrowers with qualifying loans are eligible for consolidation, including those with Direct Loans, Federal Family Education Loan (FFEL) Program Loans, and other types:
Eligible federal loans
- Subsidized Federal Stafford Loans from the FFEL Program
- Unsubsidized and Nonsubsidized Federal Stafford (FFEL) Loans
- FFEL PLUS Loans
- 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*
- 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 are considerations and exceptions for certain types of loans:
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.
Generally, you can’t consolidate an already-consolidated loan, but under certain circumstances, you may be able to. For a single existing FFEL Consolidation Loan, reconsolidation may be possible if you’re in default or delinquency and plan to repay with IDR; in order to qualify for PSLF; or if you’re an active-duty service member and want to use the “no accrual of interest” benefit.
Note that 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, but these can be separately consolidated in order to qualify for other federal benefits, such as IDR.
Ineligible Loans: Private Loans
Note that private education loans are not eligible for federal student loan consolidation. Changing the terms of your private loans with a lender usually requires a strong FICO credit score, but a federal student loan consolidation does not carry this requirement and so can be available to more people — especially young graduates who may not have had the chance to build up their credit history. To explore your options with private loans, consider refinancing, which can also be done with federal loans — but note that by refinancing federal loans with a private lender, you forfeit federal benefits like Income-Driven Repayment plans and loan forgiveness options.
What to expect during and after loan consolidation
Once your loans are consolidated, you’ll have a new interest rate and a single monthly payment. This simplifies your repayment process, but budgeting for this new amount is essential. Your monthly payment could vary based on the chosen repayment plan and loan term.
Consolidation itself doesn’t significantly impact your credit score. However, how you manage your consolidated loan can influence your creditworthiness. If you make on-time payments and maintain a positive repayment history, consolidation may positively impact your credit score over time.
If you’re pursuing loan forgiveness programs like PSLF or IDR, it’s important to understand the impact of consolidation. While consolidating can make certain loans eligible for forgiveness programs, it can reset your progress in other cases. It’s important to be prepared, and talking to financial experts, like our student loan specialists, ensures you understand every detail.
Consolidating your student loans could be a great way to make the repayment process more manageable. It may also help you save money in the long run when done right. Researching your options and knowing what to look for when seeking a loan could help ensure you get the best consolidation loan possible.