Federal Student Loan Consolidation Tools and Tips

Federal student loan consolidation is sometimes necessary to take advantage of student loan forgiveness programs or income-driven repayment.

Written By: Michael P. Lux, Esq.

Last Updated: July 18, 2021

Did you know?

Consolidation can cause your debt to temporarily double on your credit report.

This happens when the new loan is reported to the credit bureaus, but the old loans are not yet removed.

Servicer Selection

Federal consolidation is one of the few times that borrowers get to pick their loan servicer.

Borrowers considering PSLF should select MOHELA as they handle all of the PSLF applicants.

What is Federal Student Loan Consolidation?

In federal direct consolidation, the federal government creates a new consolidation loan for the borrower. The funds are used to pay off some or all of the borrower's federal loans.

For example, a borrower with multiple FFEL loans can consolidate the debt to create one new federal direct consolidation loan.

Why Consolidate?

Consolidation helps program eligibility. Through consolidation, borrowers can transform debt that isn't eligible for programs like Public Service Loan Forgiveness into eligible loans.

There are a few other reasons to consider consolidation, but these strategies are not very common.

Notably, consolidation does not improve interest rates. When the loans are combined, the new loan gets the weighted average interest rate rounded to the nearest 1/8th percent.

You Should Know

Private loan refinancing is different than federal direct consolidation. A private refinance is used to lower interest rates, but the new loan loses all federal program eligibility. The only place for federal consolidation is the Department of Education.
Consolidation typically restarts progress toward federal forgiveness programs like PSLF and IDR forgiveness. However, a temporary relief program can help borrowers consolidate without losing progress as long as they consolidate by December 31, 2023.
If you have subsidized and unsubsidized debt and consolidate all of your federal loans, the final result will be two consolidated loans: one subsidized consolidation loan and one unsubsidized consolidation loan.