Student Loans: How Federal Student Loan Consolidation Works

After you graduate, leave school or drop below half-time enrollment – in other words, once you enter your loan’s grace period or repayment period – you become eligible for federal student loan consolidation. Consolidation combines multiple federal loans into a single federal loan. You can’t include private loans in a federal loan consolidation. 

Federal Student Loan Consolidation Benefits

If you consolidate all your federal student loans, you’ll end up with one convenient monthly payment to one loan servicer, and your new, fixed interest rate will be the combined weighted average rate of all your old loans rounded up to the nearest 1/8 of a percent.

Federal student loan consolidation is free; there is no application fee, and you don’t need to work with a private company that wants to charge you money to help you consolidate your loans. Just apply directly to the U.S. Department of Education through StudentLoans.gov or print out an application and apply by mail. Most federal student loans can be consolidated, including Federal Direct Loans, Stafford loans (discontinued in 2010 and now made through the Direct Loan program), Perkins Loans and FFEL loans. 

When you consolidate your loans, you can extend your repayment period to as long as 30 years, making your monthly payments lower. You may also gain access to income-driven repayment plans and Public Service Loan Forgiveness that you wouldn’t qualify for otherwise.

Federal Student Loan Consolidation Cautions

However, extending your loan term will increase how much interest you pay, and you may lose any benefits associated with your existing loans, including interest-rate discounts, principal rebates, Perkins loan cancellation benefits, and any credit you’ve earned toward income-based repayment or Public Service Loan Forgiveness.

If you have loans whose benefits you don’t want to lose, you can leave them out of the consolidation process. And you don’t have to consolidate at all if you don’t want to; it’s just an option. Once you do consolidate, the decision is irreversible. Parent PLUS loans cannot be included in a student’s consolidation loan. 

If you’re currently in default on any loan you want to consolidate, special conditions apply. The loan must not be in collections, and you must either make three consecutive monthly payments to get current first, or choose one of the income-linked repayment plans when you consolidate. Once your consolidation loan is approved and paid out, your first payment on the new loan will be due within 60 days. Keep making payments on your old loans until your consolidation is finalized, unless any of your loans are in deferment, forbearance or a grace period. 

If you’re currently in a grace period on any loan you wish to consolidate, you should indicate on the application that you want your consolidation loan payments to begin near the time when your grace period ends. You could also wait to apply until you’re already near the end of your grace period. If you’re accumulating interest during your grace period, though, and you can afford to start making monthly payments, you’ll save money in the long run by foregoing the grace period.

Another reason why you might not want to include all your loans in a consolidation loan is if you have one or more loans with a significantly higher interest rate than the others. You can save money by paying off this debt separately at an accelerated pace.

Finally, while a federal consolidation loan retains your access to federal student loan benefits such as interest-free deferment on subsidized loans, it might not offer you the lowest interest rate. Refinancing with a private lender could result in a lower rate. However, you could get the best of both worlds by choosing a federal consolidation loan and accelerating your repayment schedule.

If you do want to consider refinancing federal loans with a private lender – or if you’re looking for a lower interest rate or a single monthly payment on private loans – continue to the next chapter on private student loan consolidation.