Federal Consolidation can simplify your student loan repayment and give you access to a longer term of repayment, but longer terms can result in higher overall costs. As you weigh the pros and cons, keep in mind that timing is critical. With just a few exceptions, you get only one chance to consolidate with the government loan programs.
Less Paperwork: Consolidation makes repayment more convenient by downsizing the process for multiple loan holders and condensing the paperwork into one monthly payment to one lender. This can eliminate some of the confusion and overwhelming sense that people feel when they are overloaded with forms. Less paperwork means less room for error and the likelihood that someone might miss a payment.
No Fees: If you consolidate your federal student loans you go through the Department of Education and there are no fees associated with their consolidation process; however, the interest rate is rounded up to the nearest 1/8th of 1% and a few borrowers might lose an earned interest rate reduction (see below). If you consolidate with a private lender, you are not guaranteed the same thing. In general, it is dangerous to consolidate federal loans into a private student loans.
Eligibility for Public Service Loan Forgiveness: Only Federal Direct Loans are eligible for Public Service Loan Forgiveness. Borrowers with federal loans from before July of 2010 might have another kind of federal loan through a program called FFEL. Consolidating FFEL loans into a Federal Direct Consolidation loan can make the loan eligible for Public Service Loan Forgiveness .
Additional Options: When you consolidate, you may be eligible for renewed deferment benefits. If you’ve already exhausted your options on your current loans, there is a possibility of renewing on those options when you consolidate.
Changes to Interest Rates: Federal student loans have been at fixed interest rates since 2006. Borrowers with older loans at variable interest rates can lock in a fixed interest rate by consolidating, but most recent graduates cannot improve their interest rates by consolidating. Some borrowers may have earned lender specific interest rate reductions (usually only for those who have made a number of on time payments) and those reductions would be lost.
Potential for Increased Overall Costs in Interest: Consolidation loans have longer standard repayment terms, which can result in increased interest charges over time. Borrowers should balance their desire for a low monthly payment with their desire to minimize the overall cost over the loan term.
Loss of Certain Borrower Rights: This is mostly an issue if you consolidate your federal loans into a private loan. If you choose to do this, you are no longer entitled to the repayment options and borrower benefits you’d normally get through your federal loan—like unemployment deferment, loan forgiveness programs, and a grace period. Loss of rights may also occur if you consolidate particular federal loan programs into another federal loan program—this is primarily a problem with Perkins loans.
Ineligible for IBR (on PLUS Loans): As a parent PLUS loan borrower it is important to know that if you choose to consolidate your PLUS loans with your prior student loans, you will damage the entire consolidation loan and will not qualify to pay back the consolidation using IBR. If you do choose to consolidate, it would be wise to isolate the PLUS loan and pay them individually.
WARNING: It is very dangerous to consolidate federal loans into a private consolidation loan. You will lose your rights under the federal loan programs once you choose to consolidate with a private lender. These include deferment, forbearance, cancellation, and affordable repayment rights. Federal consolidation loans generally have lower interest rates.
Mackenzie Maher graduated in 2010 from the University of California at Santa Barbara with a BA in Global Studies and a minor in Professional Writing, with an editing emphasis. Mackenzie’s diverse portfolio also includes writing, editing, photography, and documentary script writing on such subjects as travel, career, and finance. Next to writing, she is most passionate about world travel (she has visited 24 countries).