In Debt Management, Personal Finance, Student Loans

Should you consolidate your student loans? This is a common question student loan borrowers have when they are looking for ways to reduce their debt, streamline the administrative process, or both. 

Consolidating your student loans isn’t a one-size-fits-all answer, however. Consolidating your student loans has short-term and long-term impacts on your financial situation. Therefore, before you consolidate your student loans, it’s important to know how it can potentially help or hurt your financial life.

There are also a lot of misconceptions out there about how student loan consolidation works and when it should be considered. Here are four myths about consolidating student loans that may surprise you.


Myth 1: Federal student loan consolidation will help lower your student loan interest rate.

Not exactly. The perception is that consolidating student loans is necessary to lower interest rates, but in reality, that is not the case. Instead, quite the opposite usually occurs, and you can wind up paying even more interest in your consolidated student loans. 

The reason for an increased (rather than decreased) student loan interest rate is because when you consolidate your student loans, the new interest rate of your consolidated loans becomes a blended rate of all your student loans and an additional .125% is added to the blended interest rate. So, if your goal is to minimize the amount of interest you pay on your student loans over time, consider other repayment options, such as making extra student loan payments instead.  


Myth 2: Qualifying for Public Service Loan Forgiveness (PSLF) requires that you consolidate your loans.

Consolidation of certain types of loans is an underlying requirement of one of the PSLF requirements, which is not usually clearly explained or understood. The consolidation of student loans is not a blanket requirement to qualify for PSLF. Let me explain.

If you work for a qualifying employer, such as a government organization (federal, state, local, or tribal), not-for-profit tax-exempt 501(C)3 entity, and certain non-tax-exempt not-for-profit entities, you may be eligible for PSLF if you meet the following requirements. 

To be eligible for PSLF, you must:

  • Have Direct Loans
  • Work full-time for a qualifying employer
  • Be enrolled in an Income-Driven Repayment Plan
  • Make 120 qualifying student loan payments. (The qualifying payments do not have to be made consecutively.) 

You do not need to consolidate Direct loans to qualify for PSLF, but you may need to consolidate other types of loans to enroll in an Income-Driven Repayment Plan, which is one of the requirements of PSLF.

  • If you have Perkins Loans and/or FFEL, consider consolidating these loans in order to make them eligible for an income-driven repayment plan enrollment.  
  • If you already have Direct Loans, you do not have to consolidate them in order to enroll in an income-driven repayment plan.

Caution: Consolidating your student loans after you make qualifying payments toward PSLFs restarts the clock and you lose credit for the qualifying payments you already made, so be careful!


Myth 3: Federal student loan consolidation will reduce your repayment term.

Federal student loan consolidation can actually expand the maximum repayment term to 30 years, although you can remain in the standard 10-year repayment plan after you consolidate your loans. If you choose to forgo the 10-year standard repayment term after you consolidate your loans, your repayment term will depend on your total loan indebtedness. 

Here’s a helpful chart to give you an idea of what your repayment term would be if you consolidated your loans and choose not to remain in the standard 10-year payment plan. 

Caution: Consolidating your student loans can be very costly over the long term. Student loan consolidation that extends the term of your repayment over more years may lower your monthly payment. However, during the extended repayment term, you’re likely to accrue and pay more interest on your student loans over the long term.  Also, while there are no administrative fees associated with student loan consolidation, when you consolidate your loans, all the interest that accrued prior to consolidation will be added to the principal balance. As a result, you will pay interest on the interest that was added (capitalized) when the loan consolidation is complete. Ouch! 


Myth 4: To enroll in an Income-Driven Repayment plan you must first consolidate your federal student loans. 

If you have Direct Loans, you do not need to consolidate them in order to enroll in an income-driven repayment plan. It is only when you have Perkins Loans or FFEL Loans that you should consider consolidating in order to make these loans eligible for an income-driven repayment plan. 

Income-driven repayment plans make it easier for you to pay off your federal student loans. As a general rule of thumb, if your student loan debt is twice your annual income, you are having difficulty making your student loan payment(s) under your current repayment plan, or you work for a qualifying employer that is eligible for Public Service Loan Forgiveness (PSLF), enrolling in an income-driven repayment should be strongly considered.

For more guidance on Income-Driven Repayment Plans, grab a copy of my PROFESSIONAL’S GUIDE TO PAYING OFF STUDENT LOAN ebook. I describe the income-driven repayment plan options, how to determine your eligibility, and how enrolling in an Income-Driven Repayment Plan can help you accelerate other important financial goals like buying a home and saving for retirement.


Pros of Student Loan Consolidation

Federal student loan consolidation does offer some benefits. Consolidating your loans can help cure default if you have defaulted on your student loans. Federal student loan consolidation can also make loans that are ineligible for Public Service Loan Forgiveness (PSLF), like Perkins Loans and FFEL loans eligible. Federal Loan Consolidation simplifies things administratively because it reduces the number of loan servicers you have to manage. Though, just as with any major financial decision, you should weigh the potential benefits against the risks to determine which choice is best for your situation.



Consolidating student loans and selecting the best student loan repayment option for your needs shouldn’t be done in a vacuum. If this is your situation, I suggest that you consult with a CERTIFIED STUDENT LOAN PROFESSIONAL™ that has the expertise and advanced knowledge to help you create and implement the optimal student loan repayment plan that is right for you.. 


Exciting New Service Offering Announcement!

Future Map Financial now offers Student Loan Repayment Consulting for student loan borrowers. This service is to help you identify challenges and opportunities related to your current student loan repayment plan and to assist you with creating and implementing the optimal student loan repayment strategy for your personal and financial circumstances. Click Here to Learn More!

As always, I invite you to reach out to me – in real life – with any comments, feedback, or questions!  [email protected] Are you ready to take the first step towards securing your financial future? If so, schedule your free 30-minute no-obligation student loan repayment consultation with me today. Schedule Your Consultation with Frank.

Disclaimer: The information contained in this article is for informational purposes.  None of the information provided in this article is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. Please consult with your accountant, finance professional, and/or legal counsel regarding your specific circumstances. Reproduction of this material is prohibited without written permission from Frank Shields, and all rights are reserved. Read the full Disclaimer.

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