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Should You Consolidate Your Student Loans? What to Know Before Payments Resume

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David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
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About 27 million student loan borrowers are bracing for monthly payments on federal loans to resume now that a pause introduced during the pandemic is set to end. About half will have to pay at least $200 per month, and one in five will be expected to pay more than $500 per month.

That’s a big blow, and many are trying to figure out how to soften it. For some, consolidation can help: Grouping loans into a single obligation can streamline payments, help with forbearance and make people eligible for federal repayment plans that can reduce monthly bills and lead to eventual forgiveness.

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Christopher Furlong/Getty Images

But lumping loans together can trigger other issues, including the loss of some lower interest rates. And not all loans can, or should, be consolidated. It’s really important to read the fine print, but the time to do this is limited because there are some federal deadlines coming up.

Here’s what student-loan experts want you to know about consolidation, and whether the process is right for you.

What is federal student loan consolidation?

This combines two or more existing loans into a single balance with a single servicer that has the status of a federally-backed loan. Private loans can’t be part of this process.

How is consolidation different from refinancing?

Refinancing typically refers to moving a federal or a private student loan to a private lender. While that might earn a lower interest rate, that could deprive a borrower of access to certain federal programs, like the possibility of forgiveness after a certain number of qualifying payments as well as the ability to apply for forbearance in times of hardship.

What repayment plans are available, and how does consolidation figure in?

Income-driven repayment (IDR) plans calculate a person’s monthly payments based on their income. For people who are struggling to cover their payments, switching to one of these can help make them more affordable.

The Biden administration’s new Saving on a Valuable Education plan is a type of IDR plan, but it protects more income from repayment so monthly payments can be lower than other plans. SAVE also stops unpaid interest from piling up for people who make their monthly payments on time. The administration estimates that the plan can save some borrowers at least $1,000 per year in payments.

If one or more of your loans don’t qualify for these programs, consolidating them might help change their status. This is the case for loans that borrowers took out through the older Federal Family Education Loan program. Parent PLUS loans currently have to be consolidated twice to qualify, which complicates matters (more on that later).

Consolidating loans can also make them eligible for the Public Service Loan Forgiveness (PSLF) program, which is available to borrowers who work for the government or in other public service jobs like teaching and nonprofits.

Will consolidation lower my interest rate?

The Department of Education determines a borrower’s new interest rate by taking the weighted average of the interest rates for the loans being consolidated. There are calculators on student-loan resource sites that can help you model what your new interest rate will likely be.

Betsy Mayotte, the president and founder of The Institute of Student Loan Advisors, noted that borrowers with FFEL loans in particular will want to weigh the benefits of consolidating versus losing a lower interest rate, given how low those were in the early 2000s.

“Some of my older FFEL borrowers have interest rates below 2% that they would lose if they consolidated because the discount doesn't always travel with the consolidation,” she said.

How does consolidating affect my monthly payment?

Consolidating and then enrolling in an IDR program can help some borrowers save money, especially compared to a standard payment plan. That depends on your income to debt ratio; it might not make sense to enroll in an IDR plan calculated at 10% of your monthly income if a standard payment would be cheaper for you, for example.

Federal borrowers who were enrolled in an IDR before the pandemic also need to be careful. If you now make more money than you did back then, your monthly bill may increase more quickly than if you left your loans alone. That’s because the DOE hasn’t required borrowers to recertify their income over the course of the payment pause, effectively freezing some people’s IDR payments to whatever info was last on file.

“If somebody consolidates, it also resets their IDR payment because you have to give your income information again,” said Travis Hornsby, the founder of personal-finance resource site Student Loan Planner. “That's why it's not so easy to say, ‘Hey, everybody consolidate,’ because you might reset your payment from what it was in 2018.”

Can Parent PLUS Loans be eligible for SAVE?

Parent PLUS loans would technically be eligible only for a type of IDR plan known as income-contingent repayment plan if the borrower consolidates those loans. But a loophole known as double consolidation will let them get repackaged again to qualify for SAVE and other IDR plans, said Mayotte. That allowance is ending in July 2025, the DOE noted in recent rule-making.

Until then, the process for taking advantage of the loophole can be confusing — and the DOE’s consolidation application likely won’t walk you through it. This is where talking to a student-loan expert one-on-one might be helpful.

Can consolidation help towards student-debt forgiveness?

Loans that are consolidated into PSLF or IDR plans also become eligible for forgiveness after a certain amount of qualifying payments. For PSLF, that’s 120 qualifying monthly payments, or at least 10 years’ worth of bills. Those under IDR plans will have to make either 240 or 300 qualifying monthly payments, which translates to 20 or 25 years’ worth of bills, depending on their loan type.

Why would I want to consolidate my loans now?

The DOE is currently trying to rectify some longstanding frustrations with IDR and PSLF programs, but the deadline for taking advantage is Dec. 31, 2023.

For years, borrowers who thought they were making loan payments that would ultimately count toward forgiveness found themselves denied relief — even after they reached 10 years of payments for the PSLF program, or the 20 or 25-year mark for IDR programs. To add to the misery, the department’s account of the numbers of payments people had made didn’t reflect what they’d actually done.

Last April, the DOE announced it would perform a one-time audit of the payments that borrowers made under IDR and PSLF programs, to make sure that tallies for qualifying payments were up to date. The audit has so far helped wipe at least $39 billion for IDR borrowers and $42 billion for PSLF borrowers.

As part of the account adjustment, borrowers are allowed to consolidate their student loans without losing their IDR or PSLF payment history. (In the past, consolidating your loans would reset your qualifying payment history to zero). If borrowers act by the end of this year, the largest number of payments they made will count towards all their consolidated loans.

This can particularly benefit people who have made dozens of payments on their older undergraduate loans, but have made far fewer on graduate loans — the consolidated loan would reflect the higher number of payments. That only applies to consolidations made by Dec. 31; otherwise, the department will consider a weighted number of payments for any consolidated loans.

“Somebody that has a loan from a program 20 years ago but then went back to grad school could consolidate and get all the credit from that old loan applied to all the grad school debt that's a lot more recent,” said Hornsby.

Who else should be thinking about student-loan consolidation?

People who are unhappy with their current loan servicer can consolidate and transfer their balance elsewhere. Those with loans at multiple servicers can lump them together to get a single payment per month, avoiding the headache of having to keep track of what’s due to several different entities.

Mayotte said that consolidation might not make sense for recent graduates who haven’t made many payments (if any at all) toward their loans, but that it can be useful for people who want to use the Fresh Start plan, another temporary program meant to help borrowers get out of loan default.

What are some pitfalls of consolidation?

Any unpaid interest will get folded into the consolidated total you owe, so you’ll start over with a higher balance as your baseline. As a result, your monthly payments may go up, depending on your interest rate and current income.

And just as refinancing with a private lender results in the loss of federal perks, consolidating federal loans can cancel some benefits attached to them. Perkins loans, for example, are available to teachers and other public-service workers and are eligible for cancellation after as little as five years of service. Consolidating those loans would render them ineligible for forgiveness under that time span, which is shorter than even PSLF forgiveness.

You can always decide to consolidate some loans but not others, if you want to retain some benefits.

How does consolidation impact forbearance?

Consolidating your loans will also impact your forbearance history, which can be useful if you’re really struggling with payments. Borrowers are typically allowed three one-year forbearance periods for their loans; if a borrower has already maxed out their three years, a consolidated loan would reset that clock to zero.

Can I still request refunds on pandemic-era payments after I consolidate my loans?

It depends. If you made the payments prior to consolidating your loans, then the answer is no.

However, if you consolidated your loans earlier in the pandemic — such as before Sept. 29, 2022 in an effort to receive the one-time forgiveness that has since been struck down by the Supreme Court — and then made payments, you can still apply to receive a refund on the payments you made during the pause.

“If you're looking to have your payments returned, it might be a good idea to hold off a little bit on your consolidation, if you need to do one, before that happens,” said Jan Miller, founder and president of Miller Student Loan Consulting.

© 2024 Bloomberg L.P.

David M. Brenner profile photo

David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
Schedule a Meeting