Federal Student Loan Consolidation

Backed by the U.S. Department of Education, a federal Direct Consolidation Loan can help you streamline your federal loan payments. Student loan consolidation is the process of taking multiple student loans and combining them into one. Another term for this is refinancing. Before consolidation, a student borrower might have multiple loans to pay back and many different loan balances to track. After consolidating his or her loans, a borrower will have just one monthly payment and just one loan balance to maintain. Many students will get federal loans for each year in school and will graduate with more than one loan to repay.

Consider a loan consolidation

If you have more than one federal student loan, you may be eligible to consolidate these loans into one Direct Consolidation Loan. You cannot, however, consolidate your private student loans into a Direct Consolidation Loan. If you are looking to refinance private loans, take a look at our private loan refinancing options.

Federal consolidation is available after borrowers enter repayment, either because they graduated or ceased to be enrolled at least half-time. A federal Direct Consolidation Loan has a fixed interest rate based on the average interest of your federal loans rounded up to the nearest one-eighth of 1 percent.


Loan A: $5,000 at 6.8%

Loan B: $10,000 at 6.0%

Consolidation Loan: $15,000 at 6.375%

Here is why:

  • The amount you owe on each loan is multiplied by its respective interest rate (5,000 x 0.068 = 340; 10,000 x 0.06 = 600).
  • These amounts are then added together (340 + 600 = 940).
  • This total is divided by the total amount you owe (940 / 15,000 = 0.063).
  • Multiplied by 100, this number creates your weighted average interest rate (100 x 0.063 = 6.3).
  • Your weighted average is then rounded up to the nearest 1/8% percent (6.3 + 0.075 = 6.375).

Source: American Student Assistance


Repayment generally starts within 60 days of the disbursement of your loan, and the repayment term can range from 10 to 30 years, depending on the repayment plan you select, your additional educational loan debt, and the amount of your consolidation loan.

In contrast, private refinance loans may be based on a variable or fixed interest rate based on the applicant’s current credit score, or income-to-debt ratio, and other factors. Private refinance rates are based on market conditions. In other words, if interest rates fall below those of the original borrowed funds, consolidation can result in a lower interest rate. Private refinance loans also usually offer a variety of repayment terms ranging from five to 20 years.

A Few Drawbacks

While consolidating federal student loans can be beneficial for some borrowers, others may find that they’re in better shape not consolidating their loans. If the weighted average interest rate is higher than many of their original loans, it might not be worth consolidating. Even if the interest rate doesn’t change after consolidating, it might mean extending the life of the loan, and that could also be expensive. Consolidating a loan means smaller monthly payments, but it will usually result in paying more interest over the total life of the loan, as demonstrated in the illustration.


What You Give Up By Consolidating

Students who consolidate their federal student loans may also give up a significant number of valuable benefits that came with their original loans, including:

Whatever your financial situation, it’s important to carefully evaluate your repayment options before taking action one way or another. If you’re considering consolidating your federal student loans, or refinancing both federal and private loan, take the time to run some numbers and make sure that you know the financial implications of what you might do.

Eligibility requirements for consolidating your federal student loans

Most federal student loan borrowers will be eligible for a federal consolidation loan. Here are some guidelines for eligibility:

Just about any federal loan – whether from the former Federal Family Education Loan (FFEL) program or the Federal Direct Loan program – can be consolidated. Private student loans that come from private lenders such as banks and are not subsidized or guaranteed by the government cannot be consolidated into a federal consolidation loan. You can, however, refinance your private student loans with a private organization.

Also, if a student took out loans in his or her name, those loans cannot be combined in a federal consolidation loan with loans that a parent took out for the student. If the borrowers are different, the loans have to stay separate.

Federal Loan Consolidation Requirements

In order to consolidate your federal loans, you must be either in your grace period or repayment period. Your grace period is determined by your loan and is the time period between when you graduate, drop below half-time status, or leave school and the time your first payment is due. The following loans are eligible for a Direct Consolidation Loan:

If you include an additional Direct Loan or FFEL Program loan in your consolidation, you may be able to consolidate an existing consolidation loan, as well. If your parent took out a PLUS Loan on your behalf, you cannot consolidate this loan under your name if you are a dependent student, however. The Direct Consolidation Loan application has more information on which loans are eligible.

Consolidation While in Default

If you are in default of a student loan, meaning you have failed to make your payments as determined by your loan terms, you have to meet certain criteria before you are eligible for consolidation. Generally, there are two ways to become eligible. If you first make satisfactory repayment arrangements with your current loan servicer, the company responsible for the administrative tasks and billing of your loan, you may be able to consolidate. Additionally, if you agree to repay your Direct Consolidation Loan under the Pay As You Earn Repayment Plan, Income-Based Repayment Plan, or Income-Contingent Repayment Plan, you may be able to consolidate your defaulted loan.

Loan Consolidation Application Process

There is no fee to apply for a Direct Consolidation Loan, and the application process is relatively easy. You can apply online at StudentLoans.gov or download the forms, print and fill them out, and mail the application. The online application process consists of five steps:

You will need to sign in with your FSA ID in order to electronically apply for a consolidation loan and complete your promissory note. A promissory note is the legal document that lists the terms and conditions of your loan as well as your rights and responsibilities as a borrower. You will sign this to affirm your intention to repay your federal loan. It is important to keep a copy of this for your future reference.

Your FSA ID serves as a digital signature and individual identifier that gives you access to your personal loan information through the U.S. Department of Education. If you do not already have a FSA ID, you can create one at the website with your Social Security number, name, and date of birth. You can also reestablish your FSA ID or password if you have forgotten either.

The U.S. Department of Education is your lender for a Direct Consolidation Loan; however, independent companies selected by them will actually service these loans. You choose which of the predetermined servicers you wish to use for your consolidation loan. This is your point of contact for anything regarding your consolidation loan and whom you will make your payments to. You should continue to make payments on your existing loans until you have received confirmation from your Direct Consolidation Loan servicer that your underlying loans have been paid off.

Direct Consolidation Loan Repayment Plans

There are three main repayment options to choose from for a Direct Consolidation Loan. They are the Income-Based Repayment Plan, Pay As You Earn Repayment Plan, and Income-Contingent Repayment Plan. The Income-Based Repayment Plan and Pay As You Earn Repayment Plan are based on the difference between your adjusted gross income and 150 percent of the poverty line, depending on your state of residence and family size. As your income changes, so do your payments, and both are dependent on a partial financial hardship. The payments will be lower than that of the 10-year standard repayment plan, but will extend the life of your loan, and you will likely pay more in the long run.

The Income-Based Repayment Plans and Income-Contingent Repayment Plans have a 25-year timeframe after which, if you have made qualifying monthly payments, the existing loan amount will be forgiven, although you will be responsible for taxes on the forgiven amount. The Pay As You Earn Repayment Plan has a term of 20 years. In the Income-Contingent Repayment Plan, your monthly payments are based on your adjusted gross income, family size, and amount of your Direct Loans, and it will be calculated annually.

All three plans will generally have lower payments than those associated with the 10-year standard repayment plan but will extend the life of your loan, and you will likely pay more in the long run. Your loan servicer will have the specific information on which repayment plans they offer.

Frequently Asked Questions
What are some of the disadvantages of student loan consolidation?

Depending on the rates of your federal loans, it is highly possible that the consolidated student loan rate will be higher than the interest rates on your other loans. Furthermore, If you have already paid off a significant amount of your student loans, consolidation may no longer be worth it.

May I re-consolidate a federal consolidation loan?

The only way you can re-consolidate a federal consolidation loan is by adding a new (or otherwise not already consolidated) federal loan. Therefore, if you have already consolidated your loans once and now have a new loan that was not part of the original consolidation, you can re-consolidate the loans. Keep in mind that the rate on your re-consolidated loan will be different than that of your original consolidation loan. Remember the existing consolidation is considered a single loan, so the new re-consolidated loan’s interest rate will be equal to the average of existing consolidation loan and all the newly added student loans, which is then rounded up to the nearest 1/8 percent.