Pros and Cons of Consolidating Student Loans

Federal student loan consolidation lets you combine multiple federal loans into one, simplifying repayment and potentially lowering your monthly payments by extending the loan term. However, it’s not the best option for everyone; it can increase the total cost of borrowing and lead to interest capitalization.

It’s important to note that consolidation differs from refinancing. While refinancing can lower your interest rate by replacing your federal loans with a private loan, it may also cause you to lose access to federal repayment plans and forgiveness programs. This guide focuses on the pros and cons of federal loan consolidation and how to apply.

Pros 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 of consolidating student loans so you can determine whether loan consolidation is right.

Here’s more about each item in the list above—or jump to the cons if you want to see that list.

✅ 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-driven 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. 

“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®

Cons of student loan consolidation

Here’s more about each downside.

✖️ 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 to 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 borrower benefits

Some older student loan types come with certain benefits you’ll lose if you consolidate those loans. For instance, some FFEL loans offer 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. 

Our expert’s advice

Erin Kinkade

CFP®

To be sure you understand the repercussions of your consolidation, consult a financial counselor or professional to help walk you through the critical considerations. Don’t just assume a consolidation will mean better terms (although it can). Understanding your intentions and goals with consolidation is critical for the financial professional, so they can educate you on the actual impacts and discuss the options and alternatives to meet their goal.

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Tip

You don’t need 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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Recap of the pros and cons of student loan consolidation

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