Federal student loan consolidation 101

Nearly 70 percent of recent college graduates leave school with student debt.

According to Student Loan Hero, class of 2016 graduates finished their undergraduate year owing an average of approximately $37,172 [1]. The increase in average debt is partly influenced by tuition and fee hikes at public and private institutions. On an entry-level salary, you would likely find monthly payments overwhelming.

Consider consolidating your federal student loans if you're looking for repayment relief.

What is consolidation?

When you consolidate your student loans, you're helping ease the financial strain you may be feeling after taking out multiple loans in college. Remember, only federal student loans are eligible for consolidation, whereas private loans can be refinanced.

Per the U.S. Department of Education, federal loans eligible for consolidation include [2]:

• Direct subsidized
• Direct unsubsidized
• Subsidized Federal Stafford
• Unsubsidized Federal Stafford
• Direct PLUS
• Federal Perkins
• Federal Nursing
• PLUS loans from FEEL Program
• Health Education Assistance
• Supplemental Loans for Students

How does the process work?

According to NerdWallet, the federal government pays off your student loans by replacing them with a direct consolidation loan [3].

This loan will come with a new interest rate, which is a weighted average of your loans' rates. Time Money used the following example to illustrate this concept [4]: Assume you have two loans. The first is for $10,000 and has a 4 percent rate and the second is a $5,000 loan with a 6 percent interest rate. A new consolidated loan would carry a $15,000 balance and 4.7 percent interest rate.

Given the nature of consolidation, it's important to realize it won't always result in a lower interest rate. In fact, this new rate may actually be higher than before you consolidated. The good news is this rate is fixed, and you only have one loan to handle.

To get started on the process, you'll want to head over to studentloans.gov to complete an application and promissory note.

Why should I consolidate?

As you've seen during repayment, you're not actually dealing with the federal government. Instead, you work with a loan servicer – a company that handles billing. 

Consolidation entails turning these loans into one so you only have to worry about a single monthly payment. Reducing your number of monthly bills can provide relief while also making it easier to track your repayment progress and stay organized.

Your income also plays a role in the decision to consolidate. According to the Department of Education, you may be eligible for an income-driven repayment plan, which could help lower monthly payments [5]. But as you earn a higher income, payments will also increase.

A new repayment schedule is another benefit. If your new consolidated loan is between $40,000 and $59,000, the repayment term will be 25 years. By giving yourself more time, you're able to advance in your career and up the income ladder.

Words of caution

Consolidation is not for everyone. First, you may forgo certain benefits if you choose to consolidate.

For example, Federal Perkins loans are eligible for cancelation if you become a teacher and work in a low-income school district. Up to 100 percent of a loan balance can be forgiven if you teach for one academic year while also meeting other requirements. But if you consolidate Federal Perkins loans, you lose these forgiveness benefits.

Pick and choose which ones to consolidate instead of combining all of your federal loans. You'll still be eligible for certain forgiveness benefits by doing so.

Giving yourself extra time to pay off loans is always helpful, but be prepared to spend more on interest. You can always pay more than the minimum monthly amount to balance out this particular drawback.

Finally, consolidation is different from refinancing. Federal loans can't be refinanced through the financial aid system. To refinance, you'll need to work with a private lender but that would make you ineligible for income-driven repayment plans, Time Money explained.

If you're looking for some immediate relief paying back your student loans, consider consolidating them. You're able to combine most of them into a single payment while giving yourself extra time to boost your annual income.

No one enjoys paying back student debt, but you can lessen the burden through consolidation.

[1]. A Look at the Shocking Student Loan Debt Statistics for 2016

[2]. Loan Consolidation

[3]. NerdWallet's Guide to Federal Student Loan Consolidation

[4]. Should I Consolidate My Student Loans?

[5]. Income-Driven Plans