If you have several federal student loans to repay, you might be considering federal loan consolidation. Two of the largest potential benefits of consolidating federal loans is a potentially lower monthly payment and interest rate as the current loans are merged together to make a single loan. There are other unique federal student loan consolidation benefits to consider as well.
Regarding federal loan consolidation, you have the option to consolidate all or some of your federal loans. Unlike refinancing, consolidation only handles federal student loans instead of combining them with your private loans to make a single loan. Also, most federal loans qualify for consolidation including Direct Loans, FFEL, and PLUS loans.
Benefit #1: Single Monthly Payment
Instead of having several due dates scattered throughout the month for your monthly loan payments, consolidation allows you to have a single due date for each loan. This means a lower probability of forgetting to schedule a payment or not having enough money in the bank account because the due date is right before you get paid each month. With a consolidated loan, you get to choose a new due date that works best for you.
Benefit #2: Access to Income-Based Repayment Plans
This could arguably be the most valuable reason to consolidate your loans instead of combining federal and private loans together. Federal loans have repayment and forgiveness options that private lenders do not provide.
If you earn a limited income, consolidated federal loans can qualify for income-based repayment plans that cap the monthly payment at 10% of your monthly disposable income. Consolidated loans can also qualify for the federal student loan forgiveness programs that forgive that the remaining balance after 20 years of payments, and, select government and non-profit borrowers can have their balance forgiven after 10 years through the Public Service Loan Forgiveness program.
Benefit #3: Defaulted Loans Can Qualify Too
Federal loans currently in default status can also qualify for consolidation as well. You might have to make a specified repayment amount to the current servicer before they will release the loan to be consolidated. This can allow you to enjoy the benefits of consolidation and enroll in an income-based repayment plan as well.
Benefit #4: Repayment Terms Range from 10 Years to 30 Years
You can begin the federal consolidation process as soon as you graduate, leave school, or drop below half-time enrollment. As the standard repayment term for all federal loans is 10 years, you can consolidate within the first year of entering repayment status and still pay them off on a similar timeline as if you never consolidated.
If you do need more time, consolidation allows you to extend the repayment period and reducing your minimum monthly payment. This can be a great option if you struggle to pay the regular 10-year standard repayment at the moment, although you will have higher interest charges due to the extension. When your financial situation improves, you can repay the remaining balance early with no penalty!
Benefit #5: No application, origination, or prepayment fees
Federal student loans do not charge any additional application, origination, or prepayment fees. This means you can repay the loan early without consequence. This can be very beneficial for cash-strapped borrowers and those looking to capitalize on the various consolidation benefits that make paying the federal student loans easier as consolidation doesn’t add to the total cost of the loan balance as some federal loans charge an origination fee based on the amount borrowed.
Benefit #6: Weighted Interest Rate
Federal consolidation loans factor the new interest rates a little differently than the original federal loans. With standard loans, the U.S. Department of Education determines the interest rate each academic year and it resets every July 1st. Within the past three academic years, the Direct Unsubsidized rate has ranged from 3.86% to 4.66% meaning you might have three loans with three different interest rates.
With consolidated loans, the new interest rate is weighted and rounded up to the nearest one-eighth of 1% (0.125%). For example, you have one student loan of $8,000 at 4.66% and a second at $5,000 at 3.86% that you want to consolidate. The estimated interest rate for the new consolidation loan would be 4.392%.
Unlike private refinance loans, your new interest rate will be nearly identical to the current average interest rate of your federal loans, not lower or higher. A consolidation repayment calculator can also help you easily figure out your new interest rate and monthly payment as well.
Benefit #7: Only Consolidate the Federal Loans You Want
While you can consolidate almost any federal loan you have, sometimes it doesn’t make sense to consolidate some of your loans. This can be especially true if it has an already-low interest rate and the new weighted average will make the loan more expensive.
Federal consolidation isn’t an “all or nothing” option. If you are happy with your current repayment options, you can keep them as they are. This allows you to only consolidate the loans that will benefit from the process.