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Government Student Loan Consolidation: Right for you?

Updated on June 4, 2011

College graduates with more than one federal student loan have the option of consolidation. Examples of government student loans that can be consolidated include: Stafford Loans, PLUS Loans, and Federal Perkins Loans. These loans come with variable interest rates that will go up and down over the life of the loan. By consolidating, students are able to lock in a fixed interest rate and lower their monthly payment by extending the repayment term.

There are pros and cons to the government student loan consolidation process. The most important thing is determining what is best for your personal financial situation.

Listed below are some questions and a general overview of the pros and cons of consolidating federal student loans:

What programs are available to consolidate student loans with the government?

  • Federal Direct Student Loan Program (FDLP): Direct student loan help from the government. Funding for this program has fallen off in recent years, but Democrats have made Direct Loans for education a priority.
  • Federal Family Education Loan Program (FFELP): This is a public/private partnership where private lenders use government subsidies to fund student loans. President Barack Obama announced in April of 2009 that he would like to phase out this program as he believes it adds a wasteful layer of spending.

Who qualifies to consolidate student loans with the government?

  • Anybody with at least one Direct Loan or Federal Family Education Loan (list of eligible loans) that is in grace, repayment, deferment, or default status. In-school status loans cannot be included in Direct Consolidation Loans.

Benefits of Government Student Loan Consolidation

  • Stable interest rate: Your new interest rate will be a weighted average of your government student loans (not to exceed 8.25%). You will have the same interest rate, and the same monthly payment, for the entire life of the loan. This makes financial planning and budgeting much easier.
  • Lower monthly payments: You have the option to extend the term of the loan up to 30 years. By increasing the term of your consolidation loan, you lower the required monthly payment.
  • One easy monthly payment: Instead of having to deal with multiple loans and payment dates, consolidation will simplify your life with one easy payment.
  • Multiple repayment plans: Direct Consolidation Loans offer four repayment plan options (Standard, Graduated, Extended, and Income Contingent)
  • No fee for consolidation: There is no charge for government student loan consolidation.
  • No credit check to consolidate: Since the lender (the U.S. Government) doesn't change, your current credit standing is not relevant to the loan consolidation process.
  • No prepayment penalty on the consolidation loan: You are free to pay off your loan early for no fee.
  • Easy loan application process


Negatives of Government Student Loan Consolidation

  • Could miss lower interest rate: You can only consolidate your government student loans once. If interest rates fall in the future, you will not be able to reconsolidate to take advantage of the lower rate.
  • Increased total cost: Extending the term of your loan will do two things. It will lower your monthly payments, but it will also increase the amount of interest you pay in the long run.
  • Consolidated rate could be higher than current rate: If your consolidated rate is higher than what you are currently paying it is not advised that you consolidate. The benefits of simplifying the bill payment process are outweighed by the negatives of higher interest payments.
  • Loss of grace period: You will lose your 6 month post graduation grace period if you consolidate your student loans during that time.
  • Not beneficial toward the end of loans: If you are near the end of the life of your loans, it is generally not worth the trouble of consolidating. Even dropping your interest rate a couple points does very little during the last few years of a loan.
  • Loss of Perkins loan benefits


Do you have any questions about government student loan consolidation?  If you have questions, comments, or need a helping hand leave a message below.  I'm always happy to help.  Thanks!

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