If you have several federal student loans, you may want to combine or consolidate them into one loan. You might consider this option in order to:
- Lower your monthly payment amount by extending the repayment period
- Lock in a lower fixed interest rate for the entire repayment period of the loan
- Combine multiple loan balances under a single loan holder — the US Department of Education (ED) — so that you have to make only one monthly student loan payment
You might want to take advantage of loan consolidation if you can receive a lower Consolidation loan interest rate than the rates you agreed to when you agreed to the loans initially. However, if you consolidate a Direct loan while you’re still in your grace period, you forfeit any remaining grace period and the interest subsidies paid on your behalf on that loan during that period, and you have to begin making payments on your Consolidation loan within 60 days of the consolidation. Therefore, if it’s advantageous for you to take out a Consolidation loan, try to consolidate toward the end of your grace period.
If you’re having trouble making the scheduled monthly payments on your current loans, you can lower each month’s payment by consolidating your loans and extending your repayment period from 10 to up to 30 years. Paying your debt over a longer period of time means you’ll make lower monthly payments, but for a longer time. Extending the repayment term means you’ll pay more interest over the life of your Consolidation loan, and wind up paying more for your loan in total. If you consolidate your loans, your best strategy is to request the shortest repayment period that you can afford that lets you meet minimum payment standards. This will enable you to pay off your loan more quickly and save more interest. And remember, there is no penalty for making prepayments on your loan.
If you consolidate all of your federal student loans, you’ll make monthly payments to only one loan holder, the Department of Education, which may mean less paperwork. By doing that, however, some borrowers may give up some benefits that their existing Stafford, Direct, or Perkins loans provide, such as deferment eligibility or loan cancellation options.
You can consolidate multiple Direct loans while you’re in your grace period (the six months after you leave school before you start making payments) or in repayment, including during a period of deferment or forbearance.
Remember, however, that you are not required to consolidate your federal student loans.
Consolidation is a decision that you should not take lightly. Because consolidation is often a one-time decision, learn as much as possible before deciding. Check out our Direct Consolidation FAQ as a starting point, and run your number through our consolidation calculator for a rough estimate of your loan balance, interest paid, and monthly payment amounts after consolidation.
Access the Department of Education’s Direct Consolidation Loans website for more information about obtaining a Direct Consolidation loan.