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Is Federal Student Loan Consolidation Right for You?

By Matthew Frankel, CFP® – Oct 25, 2014 at 4:15PM

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Consolidating your student loans definitely has some benefits, but there might be some potential drawbacks you need to be aware of.

If you took out student loans during most of your college career, odds are you ended up (or will end up) with a bunch of individual loans. This could cause lots of confusion, involving everything from your repayment options to how much interest you're accruing.

Source: Wikipedia.

Fortunately, there is an option called a Direct Consolidation Loan, which allows you to consolidate your Federal student loans for no additional charge. However, there are a few things you should consider before applying for this program.

About consolidating
The Direct Consolidation Loan was designed to combine all of a borrower's Federal student loans into one. And unlike what you're likely to find at a bank, Direct Consolidation Loans have no application fees, and they can be repaid at any time without penalty.

Eligible loans include, but are not limited to, Direct Subsidized and Unsubsidized Loans, Federal Stafford Loans, PLUS Loans, Perkins Loans, Federal Nursing Loans, and existing consolidation loans. Private student loans cannot be combined with Federal loans in a Direct Consolidation Loan.

Most borrowers are eligible for consolidation as soon as they graduate, leave school, or when their enrollment drops below half-time. And, the application process can be started by logging on to

There are some good reasons to consolidate
Perhaps the best reason to consolidate your student loans is that it makes your life a whole lot easier. Instead of several different payment amounts and interest rates to worry about, a Direct Consolidation Loan combines all of your loans into one bill.

And, you can actually lower your monthly payment amount. Depending on your total loan balance, consolidating can increase your repayment term from the standard 10 years to as long as 30 years. On $50,000 worth of student loans at 6% interest, this can mean the difference between monthly payments of $555 and $300.

If any of your loans are on variable interest rates, consolidation gives you the chance to switch to a fixed rate. This can be a huge benefit, especially now, when interest rates are still near historical lows. All Direct Consolidation Loans have fixed rates based on the weighted average of the interest rates of all of the loans being consolidated.

However, make sure you know what you're agreeing to
There are some potentially negative aspects of consolidating. For example, while a longer repayment term can definitely lower your payments, it can also mean you'll pay thousands more in interest over the life of the loan.

For example, if you have $30,000 in outstanding student loans at 6% interest, you'll end up paying just under $10,000 in interest over the course of your repayment. However, if you switch that to, say, a 20-year repayment plan, the amount of interest you'll end up paying soars to about $21,600. So, even though your monthly payment will be about 33% less, the total cost of borrowing the money becomes more than twice as expensive.

And, you could lose any borrower benefits specific to your original loans, such as interest rate discounts or some loan cancellation benefits. These do not stay with the loan when your balances are consolidated.

However, this does not include benefits of income-sensitive repayment plans like Public Service Loan Forgiveness and Teacher Loan Forgiveness. Direct Consolidation Loans are eligible for these repayment plans, such as Income-Based Repayment (IBR) and Pay-As-You-Earn, and are eligible for any benefits specific to those repayment plans.

It's permanent, so be 100% sure before you agree
Before you make a decision, I should definitely stress that a Direct Consolidation Loan is not reversible. Just like when you refinance a mortgage, the original loans are paid off and don't exist any longer.

Consolidating your Federal student loans definitely has its advantages, especially if you have a bunch of individual loans, or if any of your student debt has a variable interest rate. Just make sure consolidating won't do you more harm than good before you agree to it.

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