Should I consolidate my student loans?

Hands holding a clipboard with a blue piece of paper on it that reads "student loan consolidation" — Loan consolidation is available for federal student loans, but not private

(Image credit: designer491 / Getty Images)

Student loan consolidation can make repaying your student loans a little simpler. The process, available only for federal student loans, allows you to roll your loans over into one new loan, giving you just one monthly payment to stay on top of, as opposed to multiple.

Unlike the similar but distinct process of student loan refinancing, which is possible to do with both federal and private student loans, consolidation is not a path toward lowering your interest rate. In fact, it may even lead to you paying more in interest overall. That is why, before you do it, it is crucial to weigh the pros and cons.

What is student loan consolidation?

Student loan consolidation is the process of combining existing federal student loans into one new federal Direct Consolidation Loan. That new loan is used to pay off your other existing student loans, giving you just that one monthly payment to worry about going forward.

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This new loan will have its own interest rate and terms. "You'll get to choose a new repayment plan, such as income-driven repayment or extended repayment up to 30 years, depending on your loan balance," whereas "your new interest rate will be the weighted average of your previous rates rounded up to the nearest one-eighth of 1%," said Buy Side from WSJ, The Wall Street Journal’s research and commerce team.

Borrowers can apply for consolidation through the Federal Student Aid website, and there is "no fee" and "your credit doesn't matter (like it does with refinancing)," said CNBC Select.

What are the pros of student loan consolidation?

Simplified loan management: "The single, consolidated loan simplifies your student loan repayment with just one monthly bill," said CNBC Select.

Potential to lower monthly payments: "Direct Consolidation Loans have a repayment timeline of up to 30 years, as opposed to the standard repayment period of 10 years," which "can make your loans more manageable by lowering your monthly payment," said Bankrate.

Access to additional federal benefits: "Some loans must be consolidated before they're eligible for certain federal benefits," said Buy Side From WSJ. "If you have a Parent PLUS loan, for example, you have to consolidate it before you can get it on income-driven repayment."

What are the disadvantages?

Will not lower your interest rate: Not only will consolidation not lower your interest rate, it may lead to a paying higher rate, as the new loan's rate is "calculated as the weighted average of your loans' original rates," which means it "won't take into account any current rate discounts or rate reductions you may have," said CNBC Select.

May lead to paying more overall: This could occur for two reasons. For one, "when you consolidate, that unpaid interest gets added to your principal, raising that balance," leading you to pay "interest on that higher principal," said CNBC Select. Secondly, if you opt to extend your repayment term, "you'll end up paying on your loans longer and ultimately paying more over time in interest."

Could cancel progress toward loan forgiveness: "If you've been working toward loan forgiveness through the Public Service Loan Forgiveness (PSLF) program or an income-driven repayment plan, consolidating your loans would reset your payment progress to zero," said Buy Side from WSJ.

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Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She previously served as a deputy editor and later a managing editor overseeing investing and savings content at LendingTree and as an editor at the financial startup SmartAsset, where she focused on retirement- and financial-adviser-related content. Before that, Becca was a staff writer at The Week, primarily contributing to Speed Reads.