It’s important to understand the pros and cons of consolidating federal student loans before choosing this option. Consolidating federal student loans involves combining many federal loans into one loan. Resulting with one monthly payment amount and one payment due date. With less loans to track, it reduces the risk of missing a payment. There are a few downsides to consolidating loans as well.
What is Federal Student Loan Consolidation?
Federal student loan consolidation refers to the process of combining two or more federal student loans into a single loan. It’s essentially a way to make the repayments more manageable.
You can apply for and receive federal student loans every semester that you’re in college. The interest rate, repayment amount, and payment due date will be different for each loan. Plus, every loan may be disbursed and managed by a different federal loan servicer. By graduation time, you can end up with several federal student loans to manage.
Keeping track of multiple payments and lenders every month can be stressful. If a payment is overlooked, that lender adds on late payment fees and interest. Not only will this increase the cost of the loan but it will also damage your credit score. This is where consolidation can help.
When you combine federal student loans, you have one lender to keep track of till the debt is paid off. It’s pretty straightforward.
When and How to Consolidate Federal Student Loans
You can consolidate your student loans after you graduate. During the grace period (up to 6 months after graduation date) or when loans are in repayment (after the 6-month grace period).
To apply for federal student loan consolidation, log in to your FSA account at StudentAid.gov and complete the application form. Most federal student loans can be consolidated with a Direct Consolidation Loan. This includes subsidized, unsubsidized, and PLUS loans.
Direct Consolidation Loans have a fixed rate of interest, which remains the same for the entire loan repayment term. The interest rate on the new loan is calculated as the weighted average of all the loans being consolidated.
Once your consolidated loan is processed, you’ll have just one loan, one monthly payment, and one due date going forward. You’ll also be dealing with just one loan servicer.
Pros of Federal Student Loan Consolidation
Consolidating multiple federal student loans into one loan offers these benefits:
Simplifies your loan repayments and minimizes the risk of missed payments and default – Combining multiple loans into one loan. This makes management of payments and due dates easier. Not only is making one payment less stressful, it also reduces the chances of overlooking other payments. Late payments can be costly in terms of late payment fees and interest on the outstanding amount. They will also hurt your credit score.
Makes monthly payments more affordable – 10, 15, 20, or 30 year repayment terms are offered, choose the best plan for your financial needs. Choosing a longer payment term consolidation load will lower monthly payments.
Grants access to income-driven repayment plans – Set payments as a percentage of your monthly income with Income-Driven Repayment (IDR). Not all federal loans are eligible for IDR plans. Perkins Loans are one such type of federal loan that’s ineligible for IDR. In this case, consolidating your Perkins Loans with a Direct Consolidation Loan allows you to work around this restriction. This can be very helpful if you need to lower the payments on your Perkins Loans.
Grants access to additional deferment and forbearance options – A Direct Consolidation Loan is a new loan. As a new loan, it resets the clock on deferments and forbearance for up to 3 years. If you’re unemployed, job-hunting and cannot afford to repay a Federal Consolidation Loan, you may be eligible to apply for unemployment or economic hardship deferment. This will delay the payments for up to three years, which gives you time to shore up your finances.
No maximum or minimum consolidation restrictions – The federal government has not imposed a minimum or maximum to qualify for consolidation. You can consolidate regardless of how much or how little you have in federal student loans.
Cons of Federal Student Loan Consolidation
These are some of the disadvantages of federal student loan consolidation that you should consider:
Potentially accrues more interest over the longer loan term – Most students choose to consolidate their loans in order to lower their monthly payments and make them more affordable. However doing this increases the term of the loan. If you choose this option, you should know that while it will make the payments more affordable for now, you’ll eventually pay more in interest. This is because more interest accrues over the longer term.
Keeps you in debt longer – Lowering your monthly payments extends the loan term and keeps you in debt longer. This could make it more difficult or even impossible for you to get a mortgage or a vehicle loan. It could also hinder other opportunities such as investing in a business. The sooner you pay off your loan, the more money you’ll save and the sooner you’ll be able to pursue your dreams.
Resets the clock on payments towards Public Service Loan Forgiveness – If you’re pursuing Public Service Loan Forgiveness and have already made some payments towards it, consolidating your loans will reset the clock. This means you will lose credit for the payments that you’ve made to date. You may
Eliminates some borrower benefits – When consolidating your loans, you may lose some borrower benefits associated with your current loan. Such as principal rebates, interest rate discounts, and some loan cancellation benefits.
Erases any remaining grace period – Student loan borrowers receive a six-month grace period after graduation before they start repaying their loans. If you consolidate your federal loans during this grace period, you’ll lose any remaining grace period and will have to start making the repayments about 2 months after the loan consolidation is processed.
Invalidates individual lender benefits – You’re assigned a Loan Servicer to manage your loan when you consolidate federal student loans. Reduced interest rates or principal reductions on the original loans will no longer be valid with the consolidated loan. You’ll only have access to any benefits and perks that the new loan servicer offers.
Offers a rounded-up interest rate – The rate of a Direct Consolidation Loan is calculated as the weighted average interest rate plus one-eighth of one percent. If your larger loan amounts have a higher interest rate, the weighted average will be higher than the simple average. You’ll end up paying a higher interest rate on the consolidated loan.
Should You Consolidate Your Federal Student Loans?
Federal student loan consolidation is a good idea if you’re struggling with multiple repayments or need to reduce them. However, if you’ve made 3 years of qualifying payments for Public Service Loan Forgiveness, you may want to hold off as consolidation will restart the clock and you’ll lose three years of qualifying payments.
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