Student loan debt is a heavy weight to carry. Even if you can make your payments, you may have taken out different types of federal student loans to pay for college. These different loans lead to different payment due dates and different servicers to pay. As if the debt of student loans itself wasn’t enough of a headache! So how do you deal with having multiple federal student loans? One option some people chose to explore is called student loan consolidation.
Basically, student loan consolidation is combining all your federal student loans into one loan. More specifically, student loan consolidation entails the federal government paying off your student loans and replacing them with a direct consolidation loan with a fixed interest rate. You have to meet certain requirements to be eligible for student loan consolidation. If you’d like to apply for student loan consolidation, you can do so on the U.S. Department of Education’s website. The application process is free and easy. But before you apply, make sure you know how student loan consolidation can benefit (and backfire on) you.
1. Simplifies loan repayment
Student loan consolidation brings all your current federal student loans together to give you a single loan with a single monthly bill. One bill versus multiple is a much easier way to repay your loans! It’s also much simpler to keep track of one student loan than it is to keep track of many. This is the main draw for borrowers who pursue federal student loan consolidation, and it’s certainly easy to see why. No one wants to juggle ten different student loans!
2. Unlocks access to additional income-driven repayment plan options and PSLF
When you consolidate your student loans, you will also have access to income-driven repayment plans, which can extend your repayment term to 20 or 25 years. You could be eligible for plans like:
- Pay As you Earn Repayment Plan (PAYE)
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Income-Contingent Repayment Plan (ICR)
- This plan is the only available income-driven repayment option for borrowers consolidating Parent PLUS loan into a Direct Consolidation Loan.
- Income-Based Repayment Plan (IBR)
Furthermore, consolidating loans other than Direct Loans may also give you access to Public Service Loan Forgiveness (PSLF) for these loans.
3. Lowers monthly payments
Your budget can breathe a sigh of relief! Student loan consolidation can lower your monthly payment by giving you a longer period of time to repay your loans. This can help you stay current and avoid default. Not only will a lowered monthly bill reduce financial anxiety, but it will also help you build up an emergency expense fund.
4. Revives your standing after falling into default
Ugh. No one likes to fall into default. But if you’re looking for a way out of default, you could consider consolidating your defaulted federal student loans. To do this, you’ll either need to:
- Agree to repay the new Direct Consolidation Loan under an income-driven repayment plan, or
- Make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before you consolidate it
Want to consolidate a defaulted loan that’s being collected through wage garnishment? Or consolidate a defaulted loan collected in accordance with a court order after a judgment was obtained against you? You’ll have to get the wage garnishment order lifted or have the judgment vacated.
After consolidation, your new Direct Consolidation Loan will be eligible for benefits like deferment, forbearance, and loan forgiveness. You’ll also be able to accept additional federal student aid. However, consolidation of a defaulted loan doesn’t remove that default record from your credit history.
What’s the catch of student loan consolidation?
There are definitely a few downsides to student loan consolidation that you’ll need to consider first:
- Your total cost of loans could increase, due to the usual increase your repayment period that comes with consolidation (thanks, interest!)
- Consolidation is a one-time opportunity that you cannot reverse.
- If you consolidate before your grace period’s end, you’ll lose the remaining grace period on any consolidated loans.
- Consolidation could cause you to lose some of your current borrower benefits (e.g., interest rate discounts, principal rebates, or some loan cancellation benefits)
- If you are currently pursuing Public Service Loan Forgiveness (PSLF) or Income Driven Forgiveness for any of your current loans, consolidating your loans will cause you to lose credits for any qualifying payments towards these programs.
- If you are a servicemember on active duty and you consolidate your student loans, you will no longer qualify for the interest rate reduction offered under the Servicemember Civil Relief Act (SCRA) for student loans taken out prior to your service.
All of this information is specific to federal student loans, since private student loans are not eligible for a Direct Consolidation Loan. Consolidating private student loans is referred to as refinancing and is a different process with unique pros and cons.
If you want to learn more about student loan consolidation, a Student Loan Advisor can help you explore this possible student loan debt solution and how it could work for you.
Disclaimer: The viewpoints and information expressed are that of the author(s) and do not necessarily reflect the opinions, viewpoints and official policies of any financial institution and/or government agency. All situations are unique and additional information can be obtained by contacting your loan servicer or a student loan professional.