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Should I Consolidate My Student Loans? A Quick Guide

If you want to stop your student loan debt from getting out of control, you might have considered consolidation. But is it right for you?

July 8, 2022

In 2021, student loan debt in the U.S. reached $1.76 trillion, and this staggering number shows no signs of slowing. While student loan borrowers had a welcome break from payments over the pandemic, everything is set to resume at the end of August 2022. If there were ever a time to ensure your ability to manage your repayments, it’s now. It’s an excellent opportunity to ask yourself: Should I consolidate my student loans?

Student loan consolidation can seem like an attractive option, but it isn’t ideal for everyone. To help you figure out if it’s the right choice for you, we’ll run through different ways to manage your student loan debt, how loan consolidation works and the pros and cons of going down that route.

Student loan debt: What to expect

The first step to making a decision about student loan consolidation is understanding the different types of student loans and how you can receive help with repaying them.

Student loans broadly fall into two main categories: federal (provided by the government) and private (provided by a private lender). Both involve taking out a loan principal that you’ll repay, with interest charges, in monthly installments. 

However, there are also some crucial differences, a point we’ll repeatedly return to throughout this article. For example, most federal loans provide a six-month grace period after you graduate, during which you don’t have to make payments; private loans don’t offer the same benefit. 

After COVID-19 hit, the government effectively extended this grace period to everyone with federal student loans. On April 6, 2020, it paused student loan repayments, collections on defaulted loans and interest charges to help borrowers look after their finances during the pandemic.

But after August 31, 2022, federal student loan payments are set to resume. And if you’re still struggling to make ends meet, you might be worried about how you’ll afford your payments. 

So, what are your repayment options? We’ll cover loan forgiveness and income-driven repayment plans later, but for now, let’s examine our main focus: Consolidation.

How student loan consolidation works

Student loan consolidation is a way to refinance multiple student loans into one debt with a single monthly payment.

The two main options include Federal Direct loan consolidation or private loan consolidation.

Federal Direct Consolidation Loan

The Federal Direct Consolidation Loan is a refinance program that allows you to combine all your federal student loans into one larger federal loan with a single payment. 

Your loan must be in good standing, and you must be actively repaying your loan (or within the grace period), to refinance student loans through federal consolidation. If you default, you’ll need to make three consecutive monthly payments or agree to a payment plan for eligibility.

When you opt for federal student loan consolidation, you’ll get a fixed interest rate, meaning you know what you’re signing up for from the get-go and can compare it to your current interest rates.

A significant benefit of this program is that it can give you access to income-driven repayment plans or loan forgiveness. However, it does mean that any payments made under a federal loan forgiveness program will be reset. You usually have to make a fixed number of payments (e.g., 100) until your loans are forgiven under loan forgiveness programs, but consolidating your federal student loans may put your payment count back down to zero.

Private student loan consolidation 

If you’ve taken out private student loans, you may be considering private student loan consolidation, which means you’ll be working with a private loan servicer. Some people with federal loans may also choose this option since it offers more competition between providers, leading to the potential for lower rates. Doing so, however, will mean the loss of benefits and protections that come with federal student loans.

Plus, if you have a mixture of private and federal loans and want to merge them, this will be your only option.

Unlike with a Federal Direct Consolidation Loan, you may have a variable interest rate with private loan consolidation. So you may be able to access a lower rate now, but it could increase eventually.

You’ll also need a good credit score to have a chance of acceptance (something that isn’t considered for the federal loan consolidation plan).

Should I consolidate my student loan? Pros and cons

Federal and private consolidation loans come with their own considerations, but let’s look at the pros and cons of consolidation as a whole.


As we’ve seen, student loan payments are often deferred until you graduate — but unless you have a direct subsidized loan, you’ll likely accumulate interest before you don your gown and cap. 

Taking out just enough to pay for the current school year protects you from accruing more interest charges than necessary while you’re in school. For example, if your education costs $10,000 per year, and you take out a $10,000 student loan each year with a 4% interest rate, you’ll accrue roughly $4,200 in total interest over four years. On the other hand, taking out a loan for the full $40,000 upfront will rack up about $6,800 in interest while you’re in school. So, you would save about $2,600 in interest charges by borrowing only what you need each year.

However, having four or more loans when you graduate can get confusing — one monthly payment is much easier to handle. When you’re fresh out of college, you have enough to sort out, including finding a job, managing finances, paying rent and more. 

In some cases, your new interest rate after consolidating will be lower. The interest rate on most student loans is set when you accept the loan, so if rates were high at that time, you’d pay that same rate throughout the life of the loan. If today’s rates are lower, you may pay less interest over time with a student loan consolidation. Depending on the specifics of your loan, this could mean lower monthly payments.

Plus, while most student loan terms are for ten years, you may be able to extend your term to 30 years under a consolidation plan. This is another way to reduce your monthly bill.

Finally, consolidating gives you a choice over which loan servicer you go with, which is one way of ensuring you get the best deal.


Although longer repayment terms sound excellent due to the lower monthly bill, they also mean you’ll pay more in the long run since you’ll have to pay it over a longer period of time. 

For example, if you have four student loans on a standard 10-year repayment plan totaling $40,000 at 4.5% interest, you’ll pay $9,746.44 in interest over the 10-year repayment period. However, if you consolidate those loans into a 30-year plan at 4.25%, you’ll pay significantly less per month but will shell out $30,839.34 in interest over the 30 years.

Even worse, unpaid interest becomes part of the principal balance when you consolidate, making the principal balance higher. You’ll have to pay interest on the new amount, which can cost you more.

Plus, in some cases, you may have a lower interest rate now than what a consolidation loan would offer, meaning it’s probably best to stick with your current plan.

There are even more disadvantages if you have federal student loans and are considering private loan consolidation. Having federal loans offers extra protection through initiatives offering forbearance or deferment after experiencing hardship — but consolidating federal student loans into a private loan could mean you lose out.

Then there’s the fact that federal loan consolidation restarts the countdown to loan forgiveness, as mentioned previously. 

Alternatives to student loan consolidation 

If you’ve decided that the cons of student loan consolidation outweigh the pros for your situation, there are other ways to get your debt under control.


Student loan forgiveness

The federal government has several student loan forgiveness programs. 

One of the most popular is the Public Service Loan Forgiveness (PSLF) plan, which forgives loans for borrowers who meet certain requirements:

  • Working full-time in a U.S. federal, state, local or tribal government or nonprofit organization

  • Having Direct Loans or consolidating other federal student loans into a Direct Loan

  • Enrollment in an income-driven repayment plan

  • Making 120 qualifying student loan payments

If you’re eligible, you could be debt free after ten years. 

However, most student loan forgiveness programs are for those who work in the public sector and have federal student loans; if you don’t meet one or both of these criteria, you’re unlikely to qualify.

Income-driven repayment plan

An income-driven repayment (IDR) plan reduces your federal student loans to a level you can afford, based on your income. There are five plans:

  • Income-based repayment. 

  • Income-contingent repayment. 

  • Income-sensitive repayment. 

  • Pay-as-you-earn repayment. 

  • Revised pay-as-you-earn repayment.

Each one bases your monthly loan payment on your discretionary income, defined as the difference between your income and 150% of the poverty guidelines for your family, according to the U.S. Department of Education

For example, if you’re a family of two that lives in the lower 48 states, the poverty line is $17,240. Multiply the poverty line by 150%, and you get $25,860. Assuming your family earns $75,000 annually, you would determine your discretionary income by subtracting $25,860 from $75,000. This gives you $49,140 per year or $4,095 per month. 

The payment range for your IDR plan is between 10% and 20% of your discretionary income per month. So, using the example above, your monthly payment would be between $409.50 and $819 per month. 

An IDR plan lowers your monthly payment, and the loan term is 20 to 25 years, not a lifetime. After that term is up, the federal government forgives the remaining balance.

But there are also some serious disadvantages. For example, any forgiven loan amount counts as income on that year’s taxes. Plus, an IDR plan does not always lower your monthly payment — use the Department of Education’s calculator to check for your situation.

There’s a light at the end of the tunnel

Figuring out whether to consolidate student loans is a complex decision with many rules to consider. The right choice for you will come down to a myriad of factors, including your financial goals, the programs you may be eligible for and the type of loans you have. Yet whatever your circumstances are, there may be a way to reduce your debt burden.

Sometimes, that may mean paying attention to other types of debt. For example, consider trying the Tally† credit card repayment app if you have credit card debt. It combines your higher-interest credit card debt into a lower-interest line of credit, helping simplify your finances and reduce your debt over time.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.