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Should I consolidate my student loans? Find out when it makes sense

Is a student loan consolidation the right option for you?

Justin Cupler

Contributing Writer at Tally

March 19, 2020

In 2020, student loan debt reached $1.56 trillion, making it the second-highest consumer debt category after mortgages. And this staggering number shows no signs of slowing.

The fact that most graduates have taken on multiple student loans compounds the issue, creating numerous payments and interest rates to manage. Fortunately, borrowers can consolidate student loans into one manageable payment.

But is this type of refinancing always the best option?

Before we review the pros and cons of student loan consolidation and when it might be right for you, let’s first talk more about the various types of consolidation that are available.

What is student loan consolidation?

Student loan consolidation is a way to refinance multiple student loans into one debt with a single monthly payment. This stretches your payments over more years with a lower payment and lower interest rates. 

Why would I consolidate my student loans?

When you fill out your application for federal student aid and accept your student loans, you do so only for the current school year. This means you’d likely have at least one student loan for each year you’re in school.

Student loan payments are often deferred until you graduate, fall below half-time attendance or leave school. While that deferral means there are no monthly payments, it doesn’t exempt you from interest charges.

So, when you’re in your introduction to humanities class, that borrowed money is quietly accruing interest. Taking out just enough to pay for the current school year protects you from accruing more interest charges 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. If you take out a loan for the full $40,000 upfront, it 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.

The problem is you’re then stuck with four or more individual student loans after graduation, which means four monthly payments to manage. In many cases, each loan has a different interest rate.

There are two options to refinance your student loans: a Federal Direct Consolidation Loan or a private lender.

Option 1: 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. Keep in mind, you can't refinance private student loans through this federal consolidation loan.

Like any debt consolidation, there are pros and cons to a Federal Debt Consolidation Loan.


  • One monthly payment

  • Loan terms may stretch out to 30 years, which can result in lower monthly payments

  • You may qualify for more income-driven repayment plans and loan forgiveness options

  • Changes any variable-interest student loans to a fixed interest rate loan


  • Longer payment terms mean you may pay more interest over the life of the loan

  • Outstanding interest on consolidated loans becomes part of the principal balance, resulting in a higher principal balance

  • You may no longer qualify for special programs that reduce interest or the principal

  • The payment count is reset on an income-driven repayment plan or Public Service Loan Forgiveness

Qualifying for a Federal Direct Consolidation Loan

To refinance through federal consolidation, your loan must be in good standing, and you must be actively repaying your loan. The only exception to the repayment rule is if you are within the grace period, which is the time between leaving school and starting to repay your student loan.

Can you refinance a defaulted student loan?

If you default on a federal loan, then decide to consolidate it, you must make three consecutive monthly payments before it is eligible for consolidation again.

If you can’t make the three payments, you can restore eligibility by agreeing to repay your federal loan under one of the repayment plans: 

  • Income-based repayment plan

  • Pay-as-you-earn repayment plan

  • Revised pay-as-you-earn repayment plan

  • Income-contingent repayment plan

Once you agree to the modified repayment plan, your loan will qualify for consolidation.

If a judge has authorized wage garnishment on your student loan payments, you must get the garnishment lifted or the judgment vacated to become eligible.

Option 2: Private student loan consolidation

In some cases, you may skip the federal government altogether and opt for a private student loan consolidation. Like the Federal Direct Consolidation Loan, there are pros and cons to private consolidation.


  • Private loans aren't government regulated, so interest rates may be lower

  • More competition to cross-shop and get better terms

  • You can consolidate private loans and federal student loans into a single loan


  • Each private lender has its own rules, which can cause confusion when choosing a lender

  • You may end up with a variable interest rate, which can result in a higher payment if the rates go up

  • The loans don’t qualify for federal income-driven repayment and debt forgiveness programs

  • Private lenders generally don't offer deferment and hardship forbearance 

  • A good credit score is often required for approval

When does it make sense to consolidate student loans?

Consolidating student loans is the best option in some situations. Here’s when it makes the most sense:

You can’t afford your payments

When you graduate, your federal student loans enter a 10-year repayment plan with monthly payments of at least $50. If you can’t afford this payment, a student loan consolidation may be right for you.

A Federal Debt Consolidation Loan allows you to spread the repayment term over 30 years, thereby reducing the monthly payment. If you’re going with a private student loan consolidation, you may find a lender that offers terms longer than 10 years, which can also reduce your monthly payment.

You don’t qualify for federal income-driven repayment plans

If you have federal student loans, you may be eligible for a handful of income-driven repayment plans that base your monthly payments on your discretionary income. After paying that set amount for a designated number of years, the government forgives the remaining balance.

While these programs can reduce your payments and offer other key benefits, if you have private student loans or federal student loans that don’t qualify for these special loan programs, consolidating your existing loans may be your only option to save money.

You worry about variable interest rates

Some older federal student loans and private education loans have variable interest rates. When the rates are low, these plans work well, but rate increases can hike your monthly payments. If this variable rate isn’t preferable to you, refinancing your current loans into a fixed interest rate loan could be a good idea.

You struggle with making multiple payments per month

When you’re fresh out of college, you have enough to sort out, including finding a job, managing finances, paying rent and more. You can eliminate the stress of multiple student loan payments by refinancing your current loans into a single loan with one monthly payment.

You can lower your interest rate

The interest rate on most student loans is set when you accept the loan. If rates were high at that time, you’ll pay that same rate throughout the life of the loan.

If today’s rates are lower than they were when you took out your loans, you may pay less interest over time with a student loan consolidation. Also, depending on the specifics of your loan, it could mean lower monthly payments.

If you can save interest and lower your monthly payments, consolidation could be a great option.

When doesn’t it make sense to consolidate student loans?

There are also instances when you should skip consolidation and stick with the path you’re already on.

You’re eligible for an income-driven repayment plan that lowers your payment

An income-driven repayment (IDR) plan is an excellent way to save money while becoming debt-free. This repayment option ensures you have enough leftover cash each month to survive by basing your monthly payment on your discretionary income. 

Your discretionary income is 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 per year, 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. 

With the discretionary income sorted out, you can calculate the payment range for your IDR plan, which is between 10% and 20% of your discretionary income per month. 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 payments last for 20-25 years, not a lifetime. After that term is up, the federal government forgives the remaining balance.

The only caveat is any forgiven loan amount counts as income on that year’s taxes.

Keep in mind that an IDR plan does not always lower your monthly payment. Use the Department of Education’s calculator to see if an IDR plan will lower your monthly payment.

You nearly qualify for loan forgiveness

The federal government has several loan-forgiveness plans. The IDR plans mentioned above forgive any remaining balance after 20-25 years. There’s also the Public Service Loan Forgiveness (PSLF) plan that forgives loans for borrowers who meet certain requirements.

The requirements to qualify for PSLF include:

  • 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

After you’ve met the minimum requirements, the federal government forgives the remaining balance on your existing loans. So, if you play your cards right, you could be student loan-free after 10 years. Also, unlike the forgiveness under the IDR plans, you will not pay income tax on the forgiven balance under the PSLF plan.

If you’re already on the path to loan forgiveness under an IDR or PSLF plan, and have made significant strides toward having your loan forgiven, you’ll likely want to skip consolidation. If you consolidate using an FDCL now, the countdown to loan forgiveness restarts.

Even worse, if you consolidate through a private lender, your new loan will likely have no forgiveness benefits.

Your interest rate won’t be lowered by refinancing

If you already have an interest rate that’s lower than what you can get from a consolidation, it simply doesn’t make sense to consolidate.

If you’re struggling to make your monthly payments with this lower interest rate, it might be better to work out a more sustainable budget or look into increasing your income with side gigs.

You’re concerned with the total cost of the loan

Forward-looking financial professionals tend to look at the total cost of credit as opposed to the here and now. Sure, a consolidation loan’s lower monthly payment and lower interest rate may look great today, but it could end up costing you more over the life of the loan.

Many student loan consolidations include stretching out the payment terms to as long as 30 years. For example, if you have four student loans on a standard 10-year repayment plan totaling $40,000 at 4.5% interest, you will pay $9,746.44 in interest over the 10-year repayment period

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.

Is student loan consolidation the way to go?

Student loan consolidation is a complex option with many rules and regulations to consider. Lay out your short- and long-term financial goals and see if they align with what a consolidation will provide. Then weigh the pros, cons and other considerations we mentioned above. Once you do that, you should have a firm grasp on whether consolidating student loans is right for you.