Simplify Monthly Payments

Borrowers with multiple federal loans may have more than one loan servicer, each of whom bill separately for the loans they manage. Consolidating federal loans enables the borrower to obtain a single monthly payment with one servicer. If a borrower already has a single payment but doesn’t like their loan servicer, they might get a different one after taking out a new consolidation loan. This is not guaranteed as the government – not the borrower – chooses the loan servicer of the Direct Consolidation Loan.

Obtain a Fixed Interest Rate

The federal government has not issued student loans with variable interest rates since 2006. However, some borrowers are still paying off these older vintage loans. Refinancing variable-rate student loans with a fixed-rate Federal Direct Consolidation Loan eliminates the risk of higher payments should interest rates rise.

Strategies to Consider Before Consolidating

Loan consolidation can’t be undone, so borrowers should proceed carefully. If loan consolidation is the right choice for one or more loans, consider the following strategies:

• Avoid including loans with the highest interest rates in the consolidation critical link loan, so that they can be targeted for quicker repayment
• Avoid consolidating loans with a large number of qualifying payments toward loan forgiveness, as consolidation resets the loan forgiveness clock to zero
• Consider private loan refinancing if your credit is strong and you can qualify for a much lower fixed interest rate.

Keep in mind refinancing federal student loans into a private loan means a loss in many benefits income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.

• Wait until your grace period has ended
• Carefully consider whether to include a Federal Perkins Loan in the consolidation loan, as doing so loses some of the benefits of a Perkins loan

A Federal Direct Consolidation Loan does not lower the cost of borrowing. The interest rate for the new loan is a weighted-average of the rates of the loans being replaced. One way a borrower can reduce their average interest rate is to pay off loans with the highest interest rates more quickly. The ability to repay loans at different rates is lost once loans are consolidated.

If a borrower who is seeking PSLF consolidates their loans, the number qualifying payments is reset to zero for the Federal Direct Consolidation Loan. Any progress toward loan forgiveness is forfeited, since loan forgiveness is based on the loan, not the borrower.

Borrowers with strong credit may be able to obtain a lower overall interest rate by refinancing their student student loans with a bank or other private lender, rather than the federal government. The potential for lower interest costs should be weighed against the loss of access to income-driven repayment, loan forgiveness options and flexible repayment options.

A Federal Direct Consolidation Loan usually doesn’t make sense during the borrower’s grace period. Interest on Federal Direct Subsidized Loans and Federal Perkins Loans does not accrue during their respective six and nine-month grace periods. Repayment on Federal Direct Consolidation Loans begins within 60 days after the loan is disbursed. The remainder of any grace period is forfeited.

Direct Consolidation Loans Aren’t for Everyone

Parent PLUS Loan borrowers who work for the government or a not-for-profit may have the most to gain from refinancing with a Federals Direct Consolidation Loan. A Direct Consolidation Loan may also make sense for borrowers with a high level of education indebtedness whose income is too high for an income-driven repayment plan to be attractive. Most other borrowers, however, are better off keeping the loans they have unless their credit is strong enough to significantly reduce their borrowing costs through loan consolidation with a private lender.

If a defaulted loan is being collected through wage garnishment or under a court order, the collection must be lifted before consolidation can occur.