Pros and Cons of Consolidating Student Loans

Federal loan consolidation can simplify repayment on your federal student loans by combining multiple loans into one. It can also extend your repayment terms, lower your monthly payments, and open up access to certain repayment plans. 

But consolidating student loans isn’t the right move for everybody. Potential downsides of consolidating student loans include increasing your cost of borrowing and triggering interest capitalization, which tacks unpaid interest onto your loan balance. 

Note that federal loan consolidation is not the same as private loan refinancing. Refinancing involves replacing your loans with a private student loan. It can reduce your interest rate, but it may cause you to lose access to federal repayment plans and forgiveness programs. This guide will focus on federal student loan consolidation, including its pros and cons and how to apply. 

Pros and cons of student loan consolidation

Federal student loan consolidation involves applying for a Direct Consolidation Loan from Federal Student Aid to replace one or more of your current federal student loans. You won’t pay a fee to consolidate your loans, and it can simplify repayment if you’re juggling multiple loans with different loan servicers. 

Here’s a closer look at the pros and cons of consolidating student loans so you can determine whether loan consolidation is right.

We dive into the pros and cons in more detail below the lists. 

Pros

• Simplify repayment by combining multiple loans into one

• Choose a new repayment plan and access lengthier terms 

• Get a more affordable monthly payment 

• May gain access to income-driven repayment plans 

• Application process is quick and free 

Cons

• Could end up paying more over time 

• Unpaid interest will capitalize

• Interest rate could increase slightly 

• Could lose some borrower benefits

• May reset the clock on progress toward loan forgiveness

Pros explained

Here’s more about the pros we mentioned above.

Simplify repayment by combining multiple loans into one 

You can consolidate several loans into a single Direct Consolidation Loan. Instead of multiple payments with different due dates and loan servicers, you’ll make a single payment to one loan servicer each month. 

Choose a new repayment plan and access lengthier terms 

After consolidating, you can select a new repayment plan, such as an income-driven repayment (IDR) plan or an extended repayment plan. The extended repayment plan typically maxes out at 25 years, but Direct Consolidation Loans with balances of $60,000 and over can go up to 30 years. 

Get a more affordable monthly payment 

A lengthier repayment plan will reduce your monthly payments. This feature may be welcome if you’re struggling to afford your current student loan bills. 

May gain access to income-repayment plans 

Some loan types aren’t eligible for income-driven repayment plans unless you consolidate them first. For example, Family Federal Education Loans (FFEL), Perkins Loans, and Parent PLUS Loans generally need to be consolidated before they qualify for income-driven repayment. 

Income-driven plans can make your monthly payments more affordable and eventually lead to loan forgiveness. They’re also a prerequisite for qualifying for the Public Service Loan Forgiveness (PSLF) program. 

Application process is quick and free 

You can apply for a Direct Consolidation Loan for free on the Federal Student Aid (FSA) website. According to FSA, most people complete the application in less than 30 minutes. You can save your application as a draft and return to it later if you need to. 

Cons explained

Here’s more about each of the downsides we mentioned above.

Could end up paying more over time 

If you add time to your repayment term after consolidating, you can increase your costs of borrowing. A longer repayment term may make your monthly student loan payments more affordable, but it will also lead to increased interest charges over the life of your loan. 

Unpaid interest will capitalize

If you have unpaid interest on your student loans, that amount is added onto your principal balance. This is known as capitalization. You’ll end up paying interest on top of your new, higher balance, resulting in an increased cost of borrowing. 

Interest rate could increase slightly 

When you consolidate multiple loans, your new interest rate is the weighted average of your previous rates rounded up to the nearest one-eighth of one percent. This is a slight increase, but it’s worth considering before you consolidate. 

Could lose some borrower benefits

Some older student loan types come with certain benefits you’ll lose if you consolidate those loans. For instance, some FFEL loans come with an interest rate discount if you pay on time, and Perkins loans have unique loan cancellation options. 

May reset the clock on progress toward loan forgiveness

Consolidating student loans can cause you to lose progress toward loan forgiveness from an IDR plan or the PSLF program. After you consolidate, you can lose credit for the payments you made before the consolidation. 

However, the Department of Education is offering a temporary payment count adjustment for borrowers. You won’t lose credit for the payments you’ve already made if you consolidate before April 30, 2024.

Common misconceptions: Our expert weighs in

Erin Kinkade

CFP®

The most common misconception or misunderstanding I’ve experienced is the borrower refinancing or consolidating into a private student loan without realizing they would lose federal benefits. To be sure you understand the repercussions of your consolidation, consult a financial counselor or professional to help walk you through the critical considerations. Another misconception is assuming a consolidation will mean better terms (although it can). Understanding the intentions and goal of the borrower wishing to consolidate is critical for the financial professional, so they can educate the borrower on the actual impacts and discuss the options and alternatives to meet their goal.

Should you consolidate your student loans? 

Consolidating can be beneficial for some borrowers, but it’s not for everyone. Here are three scenarios when consolidating could be a savvy move, alongside three other circumstances where consolidation might not be right for you. Keep reading for more about each scenario in the table.

Consolidate if…	Don’t consolidate if…
✅ You want to simplify repayment	❌ Your goal is to save as much as possible on interest
✅ It’s necessary to get on income-driven repayment or qualify for PSLF	❌ You’ll lose valuable student loan benefits
✅ You’re satisfied with your current interest rates	❌ You have significant unpaid interest that would capitalize on your balance

Consider consolidating in these cases

These are three instances where consolidating might make sense.

You want to simplify repayment 

If you’re overwhelmed repaying multiple federal loans, consolidating could make the process easier. Instead of juggling due dates, you’ll make a single monthly payment to one loan servicer. You can also choose your next loan servicer, which may appeal if you’ve had issues with your current servicer. 

It’s necessary to get on IDR or qualify for PSLF

Consolidation may be a no-brainer if it’s required to make your loans eligible for IDR or PSLF. Only Direct Subsidized, Direct Unsubsidized, and Grad PLUS loans are eligible for IDR plans without consolidating them first. 

Other types, such as FFEL loans, FFEL PLUS loans, Perkins loans, and Parent PLUS loans, must be consolidated into a Direct Consolidation loan beforehand. This step is also important if you’re pursuing PSLF, which requires 120 payments on an IDR plan. 

You’re satisfied with your current interest rates 

Consolidation won’t reduce your interest rates, and it could even increase them. If your goal is to lower your interest rates, private student loan refinancing may be the better option. Unlike federal loan consolidation, private refinancing will not keep your loans within the federal loan program—which means losing federal benefits. 

Don’t consolidate in these cases

Your goal is to save as much as possible on interest 

Consolidating your loans can increase your overall interest charges. It may increase your rate slightly, but it can also cause interest to capitalize on your balance. Plus, extending your loan terms can lead to higher interest charges over time. 

You’ll lose valuable student loan benefits

If you’re enjoying unique benefits on your student loans, be cautious about consolidating because you could lose them. As we mentioned, consolidating can also reset the clock on your progress toward loan forgiveness, but this isn’t a concern if you apply before April 30, 2024. 

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Tip

You don’t have to consolidate all your loans. If you want to retain certain benefits on some loans, for instance, you could leave those out of the consolidation. 

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You have significant unpaid interest that would capitalize on your balance 

It may not make sense to consolidate if your loans have unpaid interest that would get added onto your balance. You can check the details of your loans by signing into your Federal Student Aid account. If you can pay off those interest charges, you’ll prevent capitalization from occurring. 

“The best candidates for loan consolidation are borrowers who are in good financial condition, have good credit, and want to simplify their monthly payments.”

Erin Kinkade

CFP®

How to consolidate your student loans 

You can apply for a Direct Consolidation Loan for free on the FSA website. To apply, you’ll need your:

• FSA ID
• Personal details, such as your mailing address, email, and phone number
• Financial information
• Information about your loans, including your loan types, servicer, amount, and interest rates

If you want to check how your consolidation will affect your monthly payment and repayment period, you can do so on Steps 1 and 2 of the application. You can also get an estimate, as well as a preview of the application, with the application demo. 

Here are the steps you’ll take inside the application: 

1. Update your personal information: The Department of Education should already have your details on hand, but review what’s on file to make sure it’s still accurate. 
2. Choose your loans and servicer: Select which of your federal student loans you want to consolidate and a new loan servicer. 
3. Select a new repayment plan: Your next step is to choose a repayment plan. Youcan see estimates for your monthly payments and long-term interest charges, so you can make an informed decision. The Loan Simulator tool can also help you compare your loan on different plans. 
4. Provide references: The Department of Education likely already has references on file for you, but you can confirm or update them as needed. It asks for references so it can contact them if you become delinquent or default on your loan. 
5. Agree to the terms and conditions: Once you’ve filled out the application, you’ll agree to the terms and conditions and sign your agreement. 
6. Review your information and hit submit: Your last step is to read it over, sign your application, and submit it. 

Once the Department of Education finishes processing your Direct Consolidation Loan, you’ll start paying it back on the agreed-upon terms. Consider setting up autopay from your bank account so you don’t miss any payments.