Cons to Consolidating Your Federal Student Loans

Calendar Icon Updated February 16, 2016

The are certain “cons” (disadvantages) associated with consolidating federal student loans into a Direct Consolidation Loan.

  • When you consolidate your federal student loans, the repayment term (how long it takes to pay off the loan) is extended. The up side to this is that it usually lowers the monthly payment you have to make. On the down side, extending the length of time it takes to repay the loan increases the total amount you’ll have to pay because you will pay more interest over the life of the loan. If your federal student loans are almost paid off, it might not be financially wise to consolidate.
  • In most cases, you’ll actually pay a higher interest rate than you paid on some of the federal student loans you had before you took out the Direct Consolidation Loan. This is because the interest rate on a Direct Consolidation Loan is based on the weighted average of loans that you’re consolidating, rounded up to the nearest one-eighth of one percent. The end result is that the interest rate will usually be higher than the interest rate you had on some of your prior loans, while lower than on other pre-consolidation loans.
  • You won’t get a grace period with a Direct Consolidation Loan. The repayment period starts immediately after you take out the loan with the first payment being due in roughly 60 days. (If you’re currently in a grace period on one or more of your existing loans and want to remain in that grace period, you can delay the processing of the Direct Consolidation Loan.)
  • If your federal student loans are in default, your credit won’t immediately improve with a Direct Consolidation Loan—though it will get you out of default. The reason for this is because your credit report will still show that you were in default previously. However, if you start paying your new monthly loan payments on time, your credit will begin to improve.
  • Payments made on loans prior to the consolidation won’t count towards the number of years of qualifying repayment required for loan forgiveness under the Income-Contingent Repayment (ICR) Plan, the Pay As You Earn Repayment Plan, or an Income-Based Repayment (IBR) Plan; or towards the 120 qualifying payments required for Public Service Loan Forgiveness. Only qualifying payments made on the new Direct Consolidation Loan are counted toward the required number of payments.
  • Consolidating existing federal student loans into a Direct Consolidation Loan may cause the loss of benefits and rights available under the prior loans (such as deferments, subsidized deferment periods, loan discharges, loan forgiveness, reduced interest rates, or repayment incentive programs). For example, if you include a Perkins Loan in a Direct Consolidation Loan, you’ll lose certain cancellation benefits that are only available as part of that program.

For further information about taking out a Direct Consolidation Loan, call the Loan Consolidation Information Call Center at 1-800-557-7392.

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