Should I Consolidate my $30,000 of Federal Student Loans?

Michael Lux Student Loan Blog, Student Loans 1 Comment

I’m frequently asked variations of this question.  Unfortunately, a lot goes into deciding this seemingly simple question.  Federal student loan consolidation isn’t about lower interest rates.  Instead it is about program eligibility.  Lower interest rates can only be achieved through a private lender.

Before we get into the factors for consideration, lets create a hypothetical for our review.  Suppose you have the following 3 federal loans for a total of $30,000:

  • Loan A has a balance of 10k and an interest rate of 6.8%
  • Loan B has a balance of 10k and an interest rate of 5.3%
  • Loan C has a balance of 10k and an interest rate of 3.8%

The Basics of Federal Consolidation

There are two things that everyone should know about federal student loan consolidation.

First, the only place that consolidates federal loans is here.  Any other “service” that tries to consolidate your federal loans is just charging you money for a simple, free government service.

Second, federal student loan consolidation does not actually lower your interest rates.  It keeps them the same.  If you have multiple loans at different interest rates, they will calculate the weighted average of the loans.  The weighted average in our example would be 5.3%.  Bottom line: if you are trying to save money on student loan interest, federal student loan consolidation will not help.

The main benefit of Federal Student Loan Consolidation is to convert Federal loans in order to gain eligibility to preferred federal repayment plans and forgiveness programs.

One reason not to consolidate…

If you have the loans in our example and want to pay off your debt quickly and with as little interest as possible, it actually is most efficient to pay them off separately.  If you are making extra payments and you pay off the 6.8% interest rate loan first, you will leave the lower interest rate loans to be paid off later.  In the long run, you pay less interest this way.  If they are all consolidated, there is slightly less of an advantage to paying off the debt faster.  The math shows that this approach can save thousands.

Borrowers should also be careful not to consolidate Parent PLUS loans with their other federal loans.

One reason to consolidate…

If you are considering student loan forgiveness programs, either through public service or the standard income based plans, you may want to consolidate.  Certain loans are not eligible for student loan forgiveness, however, they are eligible to be consolidated.  For example, FFELP Loans (loans that used to be issued as part of the PLUS program), are not eligible for student loan forgiveness.  However, they can be included in a direct consolidation loan.  If you include them, then that debt becomes eligible for forgiveness.

Dealing with different types of loans and their eligibility for certain programs can be very tricky, so it is critical you do your research before consolidating.

In this example, having only 30k in debt means that it is likely our loans will be paid off before any forgiveness program kicks in…

Private Loan Solutions…

Even though you cannot lower your interest rate through federal student loan consolidation, private lenders offer interest rates less than 3%.

Going this route can save a bundle on interest, but you do lose the benefits associated with federal student loans, such as the forgiveness programs and income based repayment.  Therefore, this decision should only be made with great care.

If you are considering going this route, it is also important to remember that you do not have to include all of your loans in the consolidation.  You are allowed to just include your high interest loans and leave your low interest loans unchanged.  For example, if you qualify for a 4.3% interest rate, you could consolidate loans A and B and keep loan C at its 3.8% interest.

A final thought

One thing that is too often overlooked is the effect on your monthly cash flow.  Whatever approach you select, it is critical to make sure that you select a workable plan.  Interest rate has a big effect on how much you pay in total, but length of repayment will have the biggest effect on how much you pay each month.  Therefore, it is critical to get a solid estimate on how much each option you explore will cost you per month.


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Stu @ Poor Student

I think to have a rough estimate which option would be best is to calculate the total money that you have to pay back by the end of your repayment plan with different scenarios. Then adjust the results with your current situation to choose the best option.