When Is a Federal Consolidation Loan a Good Idea?

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Joe Arns

By Joe Arns

May 2, 2019

Consolidating several federal student loans into a single Federal Direct Consolidation Loan may help student loan borrowers lower their monthly loan payments and simplify their finances. Federal Parent PLUS Loan borrowers need to consolidate to access income-driven repayment and loan forgiveness options.

But, borrowers should also consider the alternatives to a Federal Direct Consolidation Loan given its drawbacks. For example, consolidation prevents borrowers from paying off higher interest rate loans more quickly. Consolidation also resets the number of qualifying payments made toward potential loan forgiveness to zero.

Extend the Loan Repayment Period

Extending the repayment period of student loans beyond the standard 10-year term reduces the monthly payment burden but also increases the total interest paid over the life of the loan.

There are two main options for extending the repayment term of federal education loans. One involves a federal consolidation loan, while the other does not require consolidation.

The repayment term for a Federal Direct Consolidation Loan is 10, 12, 15, 20, 25 or 30 years. The term is based on the amount of the consolidation loan, as shown in this table.

Education Debt

Repayment Term

Less than $7,500

10 years

$7,500 to $9,999

12 years

$10,000 to $19,999

15 years

$20,000 to $39,999

20 years

$40,000 to $59,999

25 years

$60,000 or more

30 years


If the amount of the consolidation loan is at least $60,000, the repayment term is 30 years. This is the longest repayment period available for federal education loans.

Borrowers seeking the maximum possible repayment period should consider repayment plan alternatives to a Federal Direct Consolidation Loan if their total indebtedness is less than $60,000. For example, borrowers with $30,000 or more in Direct Loans and Federal Family Education Loan (FFEL) Program Loans can get a 25-year extended repayment plan without consolidation.

Borrowers with a lower income relative to their education debt level should consider income-driven repaymentoptions in addition to loan consolidation. These repayment plans offer 20 or 25-year repayment terms with loan payments based on a percentage of the borrower’s discretionary income.

Access to Income-Driven Repayment and Loan Forgiveness

Federal Parent PLUS Loans and Federal Perkins Loans are not directly eligible for income-driven repayment and Public Service Loan Forgiveness (PSLF), except through a federal consolidation loan. FFEL Loans are not eligible for the PSLF unless included in a Federal Direct Consolidation Loan.

If Parent PLUS Loans are consolidated into a Federal Direct Consolidation Loan, the consolidation loan is eligible for income-contingent repayment (ICR) if the Parent PLUS Loans entered repayment on or after 7/1/2006. ICR enables parents to cap their monthly payments based on their income. And any remaining loan balance after 25 years of payments (300 payments) is forgiven. The forgiven loan balance is taxable under current law.

Borrowers with Federal Perkins Loans may refinance them with a Federal Direct Consolidation Loan. The new consolidation loan becomes eligible for one or more income-driven repayment plans.

Although Federal Perkins Loan borrowers become eligible for PSLF through loan consolidation, they also give up the loan forgiveness options available under the Perkins Loan program. For example, a nurse working for a private practice would be eligible for loan forgiveness under the Federal Perkins Loan program but not under the PSLF. Borrowers who consolidate a Federal Perkins Loan lose the loan’s subsidized interest benefits and the remainder of the loan’s 9-month grace period.

Recover Loan(s) from Default

There are three options for getting a student loan out of default: full repayment, loan rehabilitation, and consolidation. Loan rehabilitation is usually the best choice for a first-time default. Once 9 voluntary income-based payments are made within 20 days of the due date over 10 months, the default is removed from the borrower’s credit history.

Recovering a defaulted loan through consolidation does not remove the default from the borrower’s credit history. But, a defaulted loan can only be rehabilitated once. Loans that are not eligible for rehabilitation need to be consolidated or repaid in full. An income-driven repayment plan is required for the new Federal Direct Consolidation Loan unless you make 3 full payments on the defaulted loan before consolidation. If the 3 payments are made, the borrower may choose among the available Direct Consolidation Loan repayment options.

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

Simplify Monthly Payments

Loan servicing for Direct Loans and FFEL Loans is handled by private companies working on behalf of the federal government. 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 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.


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