5 Things to Know Before Consolidating Federal Student Loans

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Can you refinance your federal student loans with the government? Kind of—federal student loan borrowers can consolidate their loans. Consolidation combines your federal student loans into one loan with one monthly payment. Learn about the pros and cons before you consolidate.

Consolidation may not be the right choice for all borrowers. Your loan types, interest rates, and how long you’ve been making payments can all affect whether consolidation is the best option for you.

Here are five things you should know before consolidating:

  1. Your monthly payment may go down, but you may have to pay longer.
  2. If you have unpaid interest, your principal balance will go up.
  3. Your new consolidation loan will generally have a new interest rate.
  4. You can lose credit for your payments toward income-driven repayment (IDR) forgiveness.
  5. You don’t have to consolidate all your federal student loans.

Keep in mind that once your loans are combined into a Direct Consolidation Loan, you can’t undo this consolidation. Learn what consolidating will mean for you before you consolidate.


Your Monthly Payment May Go Down, But Repayment May Take Longer

Consolidation could lower your monthly payments when payments begin again.

However, consolidation could also extend your repayment period (how long it takes you to pay off your loan). For example, consolidation could raise your repayment period from 10 years to 20 years. This longer period could increase the total interest you would pay over the life of your loan.

You can check how consolidation will impact your monthly payment and total repayment period. Just log in and view Steps 1 and 2 of the Direct Consolidation Loan Application.

Can’t log in? Try the application demo. Select the “Add Loans” button in the “Select Loans to Consolidate” portion of Step 1. Then type in your loan info.

Consolidating several loans into one Direct Consolidation Loan results in a single, weighted interest rate and could result in a lower monthly payment.
Consolidation combines your loans and may result in a lower monthly payment.


If You Have Unpaid Interest, Your Principal Balance Goes Up

When loans are consolidated, any unpaid interest capitalizes. This means your unpaid interest is added to your principal balance. The combined amount will be your new loan’s principal balance.

You’ll then pay interest on the new, higher principal balance. Depending on how much unpaid interest you have, consolidation can cost you more over the life of your loan.

Check how much unpaid interest you have by viewing your dashboard.

If you pay some or all of your unpaid interest before consolidating, you can avoid added interest costs later. In the example below, see how paying off interest before consolidating can result in greater savings.


You have a $27,000 principal balance of unsubsidized loans with a 6% interest rate.

  • Scenario 1
    • You have $0 in unpaid interest at the time your loans are consolidated.
    • You will pay $46,425 over 20 years on a Standard Repayment Plan.
    • Your monthly payment would be $193.
  • Scenario 2  
    • You have $3,890 in unpaid interest at the time your loans are consolidated.
    • The interest is added to the principal balance.
    • You will pay $53,113 over 20 years on a Standard Repayment Plan.
    • Your monthly payment would be $221.


Your New Consolidation Loan Will Generally Have a New Interest Rate

Not all federal loans have the same interest rate. The interest rate on a new Direct Consolidation Loan will be a weighted average based on your loan amounts and interest rates.

The weighted interest rate is calculated using the official interest rates for your loans and doesn’t take into account any interest rate reductions you may be receiving. After consolidating, your new interest rate is fixed (doesn’t change) for the life of the loan.

When you apply for consolidation, the application will calculate the weighted interest rate for you. Check out the breakdown below to understand how the formula works.

First, each loan amount is multiplied by its interest rate to calculate the “per loan weight factor.” Then, the “per loan weight factor” for each loan is added together.
Next, the amount of each loan is added together. Lastly, the total “per loan weight factor” is divided by the total loan amount and multiplied by 100 to calculate the weighted average. The number is rounded up to the nearest one-eighth of one percent.

Calculate your weighted interest rate quickly and easily: Log in and use Step 1 of the Direct Consolidation Loan Application to do the math for you.

Can’t log in? You can still use the application demo to see the weighted interest rate for your loans. Select the “Add Loans” button in the “Select Loans to Consolidate” portion of Step 1. Then type in your loan info.

Federal Family Education Loan (FFEL) Program Loans and Interest Rate Reductions

Many FFEL Program borrowers get reduced interest rates for paying on time. But if you add a FFEL Program loan to a Direct Consolidation Loan, you can lose your rate reduction.

For example, say you have a FFEL PLUS Loan with a 7.5% interest rate. You make 36 on-time payments and get a 2% interest rate reduction. So, you pay only 5.5% interest on that loan. However, you decide to consolidate. The statutory original interest rate of 7.5% would be used to calculate the weighted interest rate for your Direct Consolidation Loan.


You Can Lose Credit for Your Payments Toward Forgiveness

Are you paying your loans under an income-driven repayment (IDR) plan or are you seeking Public Service Loan Forgiveness (PSLF)? Normally, consolidating your loans would cause you to lose credit for qualifying payments you’ve already made toward IDR forgiveness or toward PSLF.

But if you apply to consolidate by June 30, 2024, any IDR payments you made before you consolidated will still count toward IDR forgiveness. And any qualifying PSLF payments you made before consolidating will count as well. Just keep in mind, your payment credits toward these forgiveness programs won’t show up until after the payment count adjustment occurs.

Learn more about this payment count adjustment.

If you apply to consolidate after the IDR account adjustment, you will lose credit for your qualifying payments. For example, say you’re on an IDR plan. You have already made 100 qualifying payments. You decide to consolidate. In this case, your payment count for forgiveness is reset to zero with your new Direct Consolidation Loan.


You Don’t Have to Consolidate All Your Loans

Do you have benefits on some of your loans that you could lose by consolidating? If so, you don’t have to include those loans when you consolidate. You can leave those loans out and maintain those benefits.

For example, say you have Federal Perkins Loans and your work would qualify you for Perkins Loan cancellation benefits. In this case, you shouldn’t include your Perkins Loans when you consolidate.

Summary of Pros and Cons

We know there’s a lot to keep in mind. The items we listed above are important to consider. Compare all the pros and cons to decide which option is right for you.

Pros and Cons of Consolidating Federal Student Loans

  • Single loan with one monthly bill
  • Lower monthly payments
  • Access to repayment plans and forgiveness programs
  • Weighted interest rate may reduce your interest rate
  • Longer repayment period
  • Pay more interest overall and make more payments
  • Unpaid interest is added to principal balance
  • Loss of certain borrower benefits
  • Loss of qualifying payments toward IDR plan forgiveness

Explore what consolidation will mean for you by starting the Direct Consolidation Loan Application. You don’t have to complete the application if you’re not ready to consolidate, and you can quit at any time.

Have questions about consolidation? Contact your loan servicer for free help. You never have to pay for help with your federal student loans, so make sure to avoid student loan scams.

Have you reviewed the points above and decided to consolidate? Follow our step-by-step instructions on how to consolidate.