Financial Aid

Does Consolidating Student Loans Save Money Like a Refinance?

Find out what if it's worth consolidating your federal student loans.

Shawna Newman

May 23, 2022

Does Consolidating Student Loans Save Money Like a Refinance?
I have a question concerning consolidating my federal loans. I have some that are subsidized and some that are unsubsidized. Can I combine these at a lower interest rate? I have graduated from college and will soon be starting to pay back my loans. My unsubsidized loans are at 6.8% and subsidized are at 5.5%. I also have many DEAL loans, a total of $25,000. Do you have any suggestions on how I could save on these loans? They are at various interest rates. — Denise G.
Consolidating your federal student loans may streamline repayment by replacing several loans with a single loan and a single monthly payment, but it will not necessarily save you money. Consolidation may have saved borrowers money in the past, but it no longer does so. There is, however, a recent exception if you are and/or were a public service employee. JUMP TO THIS SECTION. Before July of 2006 federal education loans had variable interest rates. Federal consolidation loans could be used to lock in the current interest rates on the variable rate loans since a consolidation loan has a fixed interest rate based on the current interest rates of the loans being consolidated. To the extent that the borrower was able to lock in a low interest rate, this would save money compared with the maximum possible variable interest rate.

Federal Stafford Loans and Fixed Interest Rates

The fixed interest rate on the subsidized Stafford loan depends on the academic year in which the loan was distributed. Federal Stafford loans made on or after July 2006 have had fixed interest rates. Consolidation will not allow you to lock in a newer, lower interest rate. College graduates from 2006 through 2008 had some of the highest unsubsidized Stafford loans in the last two decades, with fixed interest rates at 6.8%. Today, students are seeing the lowest fixed rate on unsubsidized Stafford loans in the last 16 years (2.75% for loans distributed in 2021). provides historical federal student loan rates by the year these loans we acquired. Below are the interest rate variations: 2020-2021 |2.75% 2019-2020 |4.53% 2018-2019 |5.05% 2017-2018 |4.45% 2016-2017 |3.76% 2015-2016 |4.29% 2014-2015 |4.66% 2013-2014 |3.86% 2012-2013 |3.4% 2011-2012 |3.4% 2010-2011 | 4.5% 2009-2010 |5.6% 2008-2009 | 6.0% 2007-2008 | 6.8% 2006-2007 | 6.8%

Direct Consolidation Loan Interest Rates

Interest rates on a federal consolidation loan are fixed and will not change. These interest rates are calculated using “the weighted averages of the loans you are consolidating, rounded to the nearest higher one-eight of one percent,” according to A borrower could say a reconsolidation using a weighted average would interest rate on the loan with the highest interest rate. However, the weighted average will also interest rate on the loan you hold with the lowest interest rate. This considered, reconsolidating an educational loan is not like a traditional refinance where you can lock in a new, less-expensive loan after interest rates dropped to make a refinance worthwhile. The use of the weighted average in a federal consolidation loan does not significantly change the overall cost of the set of loans being consolidated. Note that borrowers who consolidate their federal student loans often choose an extended repayment term. While this may make the loan more affordable by reducing the monthly payment, it does not save money because it increases the total interest paid over the life of the loan. Also, if you consolidate loans the outstanding interest on these loans are absorbed to the original principal balance, meaning your new principal balance could be higher and you could pay more in interest than if you did not consolidate. You may still want to consolidate your federal education loans to simplify repayment. Some lenders offer a single bill service, where the borrower gets one monthly bill for all their loans without consolidating. But these loans must be with the same lender. There are also pros to keeping your loans separate. If you have several loans at different interest rates, keeping them separate allows you to target the loans with the highest interest rates for earlier repayment. There are no prepayment penalties on federal or private student loans.

Types of Federal Loans That Can be Consolidated

Direct Parent PLUS loans cannot be consolidated with any federal student loans. However, the 18 federal student loans do qualify for reconsolidation:
  1. Auxiliary Loans to Assist Students
  2. Direct PLUS Loans
  3. Direct Subsidized Loans
  4. Direct Unsubsidized Loans
  5. Federal Perkins Loans
  6. Federal Insured Student Loans
  7. FFEL Consolidation Loans and Direct Consolidation Loans
  8. Guaranteed Student Loans
  9. Health Education Assistance Loans
  10. Health Professions Student Loans
  11. Loans for Disadvantaged Students
  12. National Defense Student Loans
  13. National Direct Student Loans
  14. Parent Loans for Undergraduate Students
  15. PLUS loans from the Federal Family Education Loan (FFEL) Program
  16. Nurse Faculty Loans
  17. Nursing Student Loans
  18. Supplemental Loans for Students
You should always make the required monthly payments on all your loans. But if you have some extra money, using it to accelerate repayment of the highest interest rate loan first will save you more money than if you accelerate repayment of a consolidation loan.

Public Service Loan Forgiveness (PSLF) & Temporary Expanded PSLF: Loan Consolidation

In 2021 U.S. Department of Education announced a change to the Public Service Loan Forgiveness Program rules because of the Coronavirus pandemic. This update is called the
Limited PSLF Waiver Opportunity. For a limited time, if you were employed within a qualifying public service field, you may receive credit for periods of repayment on loans that would not have qualified for PSLF. However, to qualify for the PSLF extension, you will need to consolidate any FFEL Program loans, Perkins or other federal student loans into a Direct Consolidation Loan. This PSLF extension is valid until October 31, 2022. If you think you may qualify, it is important you take the steps and complete the required PSLF and TEPSLF application and forms before the extension is ends. The interest rates on federal and private student loans are among the best interest rates available on unsecured loans. To consolidate your federal education visit to begin your consolidation loan application.

Secured Loan Consolidation to Pay for Federal Student Loans

You might be able to get a better rate on a secured loan, like a home equity loan or line of credit or a cash-out refinance, if you have excellent credit. But this is not an option for many recent college graduates. This type of federal student loan consolidation is not advisable; you will lose flexible repayment, deferment, and forgiveness options on the federal education loans, as well as the student loan interest deduction, in addition, you risk losing your home if you have trouble repaying the loan.

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