Should I consolidate my federal student loans into a federal Direct Consolidation Loan?
Before choosing to consolidate your federal student loans make sure you understand the risks.
Loan consolidation can qualify you for Public Service Loan Forgiveness (PSLF), give you access to different repayment options, help you get out of default, combine your loans into a single payment, or change the interest rate on your loan. However, consolidating federal loans may cause you to give up other benefits. Borrowers should talk to their servicers or trusted financial advisor about the risks associated with consolidation. If you are thinking about consolidating your federal student loans into a federal Direct Consolidation Loan , here are some questions to ask yourself:
Do you want to qualify for Public Service Loan Forgiveness (PSLF)?
The PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. However, consolidating a Direct Loan where qualifying payments have been made with a Direct Loan that has zero qualifying payments may decrease the total number of qualified payments credited to your new consolidation loan.
Other federal student loans that are ineligible for the PSLF Program ˗ such as Federal Family Education Loan (FFEL) Program loans, Federal Perkins Loans (Perkins Loan), and Parent PLUS loans ˗ may become eligible if you consolidate them into a Direct Consolidation Loan.
Do you want access to different repayment options?
A Direct Consolidation Loan could make you eligible for several repayment plans that may not be currently available to you. If you have federal loans through the FFEL program, Parent PLUS loan program, or the Perkins loan program, you may be able to consolidate those loans to qualify for one or more income-driven repayment programs. However, consolidating federal Perkins loans may cause you to give up other benefits. Borrowers with Perkins loans can talk to their schools or servicers about consolidation.
If you’re planning to enroll in an income-driven repayment plan and work with multiple servicers, it might be easier to have a consolidation loan, so you won’t need to submit documents about your income and household size to multiple servicers.
Do you want to get out of default?
Consolidation allows you to pay off defaulted federal loans with a new loan and new repayment terms. If you cannot afford to repay your loan in full, consolidation is the fastest way to get out of default and enroll in one of the U.S. Department of Education’s other payment plans.
Do you want to combine more than one federal loan into a single payment?
Loan consolidation can simplify your monthly payments by combining multiple loans into one loan. After consolidating your loans, you will only have to make a payment to one student loan servicer. This may make it easier to keep track of your student loans and help manage your finances.
Do you want a fixed interest rate loan instead of a variable rate loan?
Some older federal student loans have a variable interest rate. If you have a variable rate student loan, your interest rate can go up or down over time. Direct Consolidation Loans have a fixed interest rate, meaning your interest rate will not change over the life of the loan.
The fixed interest rate for a Direct Consolidation Loan is the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of a percent. While consolidating your loans may slightly increase your interest rate, it will lock you into a fixed interest rate, so your new payment going forward won’t change.