Options for managing your student debt burden: federal loan consolidation

Now that the federal student loan pause is officially ending, borrowers may be wondering how to make their student debt burden more manageable. As part of our series on options for managing your student debt, let’s dive in to another option available for federal borrowers: loan consolidation
The Highway Team
The Highway Team
Updated
Published
July 6, 2023

Post Summary

With student loan forgiveness canceled and federal student loan payments resuming in the fall, millions of Americans are mentally, emotionally, and financially preparing to deal with their student debt burdens again. 

If you’re among the millions of borrowers who are not feeling financially stable enough to resume your minimum monthly payments, what steps can you take to make your student debt more manageable? In a previous post, we explored the option of income-driven repayment plans, but another option that might be available to you is federal loan consolidation. 

Federal loan consolidation could be a good option for you if you have multiple student loans and want to make the payments more manageable OR if you have federal student loans that are not Direct loans and want to qualify for an IDR. 

What is federal loan consolidation? 

Federal loan consolidation is the process of converting one or more federal student loans into a single Direct Consolidation loan. You can apply to consolidate your loans through studentaid.gov

What loans are eligible for federal loan consolidation? 

While private student loans are not eligible for federal student loans consolidation, most federal student loans are eligible. Here’s the full list of eligible loans: 

  • Subsidized Federal Stafford Loans from the Federal Family Education Loan (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 (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

*Parent PLUS loans can not be consolidated with any federal loans made to the student. 

Why consolidate your federal loans?

There are several reasons you may want to consolidate your federal loans. The benefits of doing so include: 

  • Simplifying your debts 
  • Converting to a fixed interest rate
  • Lowering your monthly payment 
  • Gaining access to IDR plans and related possible forgiveness

Simplifying your student debts

If you have multiple federal student loans, consolidation can make it easier for you to manage your student debt by combining them into a single loan to manage. If you have multiple servicers for your multiple loans, consolidation can simplify things even further so that you only have to keep track of one login, one payment due date, and one minimum payment amount. 

Fixed interest rate

When you consolidate your loan, your new loan will have a new fixed interest rate that will be the weighted average of all the interest rates on the loans that you are consolidating, rounded to the nearest 1/8th percent.If you have any variable-loan interest rates, consolidation could be a great option for you to convert your interest rate to a fixed interest rate for more predictability. 

Lower monthly payments

In some circumstances, consolidation can help lower your monthly payment by either extending your repayment period and reducing the amount you pay for your new consolidated loan or by making your loans eligible for income-driven repayment plans. 

Access to income-driven repayment plans and possible loan forgiveness

A big benefit of federal loan consolidation is that if you have loans other than Direct loans (e.g. Parent PLUS, Stafford Loans, FFEL loans), consolidation may help you qualify for income-driven repayment plans. Additionally, through these income-driven repayment plans, you might be able to have some amount of their student loan forgiven (but only if you have an outstanding loan balance at the end of your IDR plan’s repayment period).   

What are the drawbacks of federal loan consolidation?

Loan consolidation does have benefits but before deciding to consolidate your loans, you should also understand the drawbacks of loan consolidation, including: 

  • Longer repayment periods
  • Capitalized interest
  • Loss of borrower benefits 
  • Possible reset on qualifying payments for forgiveness 

Longer repayment period

One drawback of consolidating your loans is that you may end up extending your repayment period. When you consolidate your loan, you have the option to choose a new repayment plan (standard or graduated) and your new repayment period will depend on your TOTAL “education loan indebtedness” (i.e. the total amount of student loan that you have, including other federal loans and private loans).  Note that you’ll need to list any student loans that you want to be considered in determining your new repayment period on your consolidation application. 

(What’s the difference between the standard and graduated repayment plans? On a standard repayment plan, your monthly payments are fixed and on a graduated repayment plan, your payments will start off low but increase every two years).

Depending on your total indebtedness, your maximum repayment period would be as follows: 

Loan repayment periods based on total educational indebtedness

In some circumstances, you may find yourself paying off your loans for a longer than you would have originally which means you may be in debt longer and pay more interest over time.

Capitalized Interest

Another drawback to consolidation is capitalized interest. When you consolidate your loans, any unpaid interest becomes part of the principal balance on your new consolidated loan, increasing your loan principal. A higher principal balance means more accrued interest and you might end up paying more in total interest than you would have if you hadn’t consolidated your loan(s).

Loss of borrower benefits

Consolidation may also cause you to lose access to benefits, such as specific loan cancellation options, that may be associated with your original loan. For example, if you have a Perkins loan and consolidate it into a Direct Consolidation Loan, you may no longer qualify for Perkins Loan Cancellation. 

Possible reset on qualifying payments for forgiveness

One last drawback of loan consolidation is that consolidating your loans could “restart the clock” on any qualifying payments that you may have made towards Public Service Loan Forgiveness (PSLF) or Temporary Expanded PSLF (TEPSLF).

According to the Studentaid.gov, “payments made on your FFEL Program or Perkins Loan Program loans before you consolidated them, even if they were made under a qualifying repayment plan, do not count as qualifying PSLF or TEPSLF payments. In addition, if you made qualifying payments on a Direct Loan and then consolidate it into a Direct Consolidation Loan, you must start over making qualifying payments on the new Direct Consolidation Loan.”

How do I consolidate my federal student loans? 

If and when you’re ready to consolidate your federal loans, you can apply to do so for free through the government’s student aid portal

If, for any reason, you have multiple loans and don’t want to consolidate all of them, don’t worry. You can pick and choose which loans to consolidate and which loans to leave as is. 

How else can I make my student debt payments more manageable? 

If you have private student loans or have federal student loans but don’t believe an income-driven repayment plan is for you, what other options do you have to make your student debt burden more manageable? 

Regardless of what type of loans you have or whether you’re on a repayment plan, an employer student loan repayments benefit is an effective benefit that can help you save money and pay off your loans more quickly. 

Highway Benefits removes all the hassle of launching and managing an employer student loan repayments benefit. With Highway, your employer can get a student loan repayment benefit up and running faster than you can apply and get approved for an income-driven repayment plan. 

Talk to your employer about offering an employer student loan repayments benefit today. 


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Disclaimer: This article is purely information and is not intended as financial advice. If you have federal student loans and want to know how loan consolidation will affect your particular situation, visit StudentAid.gov or speak with a financial and/or tax advisor. 

The Highway Team

The Highway Team is on a mission to spread knowledge about student loans, the state of the student debt crisis, and impactful benefits like employer student loan repayments. We're here as a helpful resources so drop us a line anytime. Find us on all the major channels as @highwaybenefits

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