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The Four Reasons to Consolidate Federal Student Loans

Consolidation is essential for some borrowers and extremely risky for others. There are exactly four situations where it makes sense to consolidate federal student loans.

Written By: Michael P. Lux, Esq.

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Affiliate Disclosure and Integrity Pledge

Temporary Forgiveness Clock Rule: The Department of Education is conducting a one-time update of IDR payment counts. Borrowers who consolidate their federal loans before April 30, 2024, can avoid restarting their progress toward PSLF and IDR forgiveness.

Federal student loan consolidation is a high-risk, high-reward process.

In some cases, federal direct consolidation is an essential step towards debt elimination. In other cases, federal direct consolidation is a huge mistake.

Reason 1: Gaining Program Eligibility

Federal direct consolidation pays off your current federal loans and replaces them with a new federal direct consolidation loan.

The big advantage of this process is that it helps borrowers qualify for certain forgiveness programs and repayment plans.

For example, FFEL loans and Perkins loans do not qualify for Public Service Loan Forgiveness. However, by including these loans in a federal direct consolidation loan, the new loan is eligible for PSLF.

Additionally, Parent PLUS loans are not eligible for any of the income-driven repayment plans. By consolidating a Parent PLUS loan, it becomes eligible for the Income-Contingent Repayment Plan.

Sherpa Tip: Because federal direct consolidation eliminates old loans and replaces the debt with new loans, the eligibility changes can be a positive or a negative, depending on your loans.

Be sure to check out the Guide to Federal Direct Consolidation to learn how to avoid mistakes in the process.

Reason 2: Fixing a Federal Student Loan Default

One common use of federal consolidation is to get out of default.

Having a loan in default is devastating for a credit score, and consolidation is often the fastest way to get out of default. The downside to using consolidation to get out of default is that the negative credit reporting lasts for years on your credit report.

The other option for getting out of default is loan rehabilitation.

Borrowers should carefully consider the pros and cons of both rehabilitation and consolidation before making a decision.

Reason 3: Skipping the Six-Month Grace Period

One of the downsides to federal student loans is that the six-month grace period after graduation is mandatory.

For borrowers pursuing PSLF, this can mean delaying forgiveness.

As a result, some borrowers opt to consolidate their federal student loans immediately after finishing school so that they can get a head start on the path to PSLF.

Reason 4: Using Consolidation to Lock In a Fixed Interest Rate

For more than a decade, all federal student loans have come with a fixed interest rate. However, as recently as 2006, federal student loans were variable-rate loans.

Borrowers who still have a variable-rate loan can use federal direct consolidation to convert to a fixed-rate loan.

Three Common Federal Consolation Reasons that are Mistakes

While there are many advantages to federal direct consolidation, it isn’t always a good idea.

In some cases, consolidating your loans is a huge mistake.

One danger to consolidation is that some loans may lose eligibility for certain programs. For example, combining a Parent PLUS loan with a Stafford loan means the Stafford loan is no longer eligible for income-driven repayment plans like IBR, PAYE, and REPAYE.

Thus, borrowers need to be selective with consolidation.

Don’t Consolidate to Streamline Your Bills.

Consolidation often means that several federal student loans become one single student loan.

This might seem appealing for borrowers looking to simplify their debt. However, because the potential benefit is small and the downside of a mistake is considerable, consolidating to streamline your bills is a huge mistake.

Changing Federal Student Loan Servicers

During the consolidation process, borrowers have the option of specifying their preferred federal student loan servicer. This is one of the only times borrowers choose to switch federal servicers.

Unfortuantely, there are no guarantees that the request gets granted. Additionally, the chosen servicer may lose their government contract or exit the servicing business, and the borrower gets stuck with a random company.

Here again, this is another situation where the potential benefit of the consolidation is small compared to the dangers.

Don’t Consolidate to Lower Your Student Loan Interest Rates

Some borrowers mistakenly think that federal consolidation is an opportunity for lower interest rates.

Sadly, the interest rate on the consolidation loan is the weighted average of the original student loans. The formula is designed so that consolidation does not impact the interest rates on a borrower’s student loans.

Borrowers wishing to get a lower interest rate on their student debt should explore private student loan refinancing.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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