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Managing Student Loan Debt Through Consolidation

Last year, the average amount of student loan debt was a little over $35,000.  Most graduates are carrying multiple student loans from multiple sources, and the cost and complexity of managing them can become overwhelming, especially if they are unable to secure steady employment with sufficient cash flow to make the payments. One option that has always been available to indebted graduates is student loan consolidation. Depending on the number and types of loans held, they can potentially be consolidated into one loan, possibly reducing the interest charges, and lowering the monthly payment. 

Benefits of Loan Consolidation

When you consolidate multiple student loans into one, there are a couple of things that happen that can usually result in a lower monthly payment. First, while most student loans are variable, meaning the interest rate fluctuates with market conditions, a consolidated loan is issued with a fixed rate. Assuming you have built a solid credit history, you could be able to qualify for a lower fixed rate which can be locked in for a longer period of time. You could also have a parent with a solid credit history co-sign for the new loan which could improve your chances of getting a lower fixed rate. 

Secondly, the new loan is amortized over 20 to 30 years which will extend your payment period well beyond the standard 10 year period for federal loans. While this will increase your long term interest costs, it will also reduce your current monthly payment to make it more manageable. As your cash flow improves, you will hopefully be able to pay down the principal which will reduce your total interest costs.

The fixed rate on a newly consolidated federal loan is calculated using a method mandated by the federal government which takes the weighted average of the interest rates on all of your federal loans and then rounds it to the nearest 1/8%. Your new fixed rate can never be higher than 8.25%. Private lenders must use this as a guideline, but they can offer lower rates to those who can qualify. 

Eligible Loans – Private and Federal

All federal loans are eligible for consolidation, including both unsubsidized and subsidized Stafford Loans, Perkins loans as well as parent’s PLUS loans. Borrowers with older Federal Family Education Loans (FFEL) issued by private lenders can use a private lender for loan consolidation, but those with Direct Federal Loans must work through the U.S. Department of Education and its Loan Origination Center's Consolidation Program (  If you don't know if your loans are FFEL or Federal Direct, you can go to the National Student Loan Data System to look them up.

Keep Private and Federal Loans Separate

If you have both privately funded FFEL loans and federally funded Direct Loans, it is recommended that they be kept separate when consolidating your loans. Generally, you may be able to find better loan terms for your FFEL loans through a private lender. Or, conversely, you may find it more difficult to find private loan rates as low as the interest rate cap on the Direct Loan Consolidation through the government. Also, if you try to consolidate your Federal Direct Loans with a private lender, you will be precluded from their special hardship repayment options, such as deferment and forbearance. The exception to this is if you hold both FFEL and Federal Direct Loans and are eligible for the newly created Special Direct Consolidation Loan program.

Consolidate Loan Repayment Plans

For direct consolidation loans, there are several repayment plans from which to choose, all designed to adapt to varying financial situations. 

Standard Repayment Plan A fixed interest rate, fixed payment plan with a $50 minimum that is paid over 10 to 30 years depending on your total indebtedness.

Graduated Repayment Plan Your minimum payment starts out low and then increases every two years over a 10 to 30 year period. The lowest minimum payment is the amount of interest that accrues monthly.

Extended Repayment Plan For direct loans over $30,000 the length of the payment period can be extended to 25 years using either the fixed monthly payment option or the graduated monthly payment option.

Income Contingent Repayment Plan Monthly payments are extended for up to 25 years and are based on annual income, loan balance and family size.

Income-based Repayment Plan For borrowers experiencing some financial hardship, the length of the loan can be extended up to 25 years, and the monthly payments are based on annual earned income and family size.

Unquestionably, your student loans were essential to getting you through college, and the plan had always been to get a job, make your loan payments and discharge the loan within 10 years. But, life happens, and plans don’t always work out. Fortunately, you have options like student loan consolidation that can make your loans more manageable.


U.S. Department of Education


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