For college students and graduates with multiple student loans, it can be confusing and annoying to try and keep track of all of those loans and payments, especially if they’re due at different times each month. If this describes you, then student loan consolidation might be able to make repaying your student loans a little bit easier.
But consolidation isn’t right for everyone. Though the process comes with a number of benefits, it can also come with some big negatives that you should consider.
Below, we discuss student loan consolidation—as well as the most significant pros and cons of the process—so that you can decide whether or not it makes sense for you.
What is student loan consolidation?
Student loan consolidation is the process of taking multiple federal student loans and combining them into a single, new federal student loan. The resulting loan is called a Direct Consolidation Loan, which will carry an interest rate equal to the weighted average of all of the loans that you’ve consolidated.
Depending on your needs and goals, you can choose to consolidate all of your federal student loans, some of them, or even just two, while leaving the others as is.
What kinds of student loans can be consolidated?
According to the U.S. Department of Education, most federal student loans can be consolidated, including:
- Subsidized and Unsubsidized Federal Stafford Loans
- Direct Subsidized and Unsubsidized Loans
- Federal Perkins Loans
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Direct PLUS Loans
- Supplemental Loans for Students
- Nursing Student Loans and Nurse Faculty Loans
- Health Education Assistance Loans
- Health Professions Student Loans
- Loans for Disadvantaged Students
- Federal Insured Student Loans
- Guaranteed Student Loans
- National Direct Student Loans
- National Defense Student Loans
- Parent Loans for Undergraduate Students
- Auxiliary Loans to Assist Students
Additionally, FFEL Consolidation Loans and Direct Consolidation Loans can be consolidated under certain conditions. Federal student loans received by a parent cannot be consolidated with the student’s loans.
Student Loan Consolidation vs. Refinancing
Though student loan consolidation and student loan refinancing are often discussed interchangeably, they are very different things.
Though there are many differences between refinancing and consolidation, the most important is: Only federal student loans are eligible for student loan consolidation.
If you have both federal and private student loans, and you want to merge them into a single, new student loan, you cannot do this through consolidation. You can, however, do this through student loan refinancing. Student loan refinancing comes with its own pros and cons, however, so it is important for you to understand all of those before you make a decision either way.
Pros and Cons of Consolidating Student Loans
|Pros of Consolidating Your Student Loans||Cons of Consolidating Your Student Loans|
|1. Consolidation can make repaying your student loans less confusing.||1. Consolidation might increase your total interest payments.|
|2. Consolidation can lower your monthly payment.||2. Consolidation may add to your principal.|
|3. Consolidation may give you access to important benefits.||3. Consolidation might cause you to lose certain benefits.|
|4. Consolidation can convert variable-rate loans into fixed-rate loans.||4. Consolidation will reset the clock on student loan forgiveness.|
|5. Consolidation gives you more options for consolidation and deferment.||5. Consolidation won't lower the interest rate on your student loans.|
|6. Consolidation can help you avoid default.||6. You can't consolidate your private student loans.|
|7. If you consolidate, you can't pay off loans with higher interest rates.|
Pros of Consolidating Your Student Loans
Here are some of the common reasons that consolidating your federal student loans might make sense for you.
1. Consolidation can make repaying your student loans less confusing.
If you have multiple federal student loans with different servicers or due dates, consolidation can make managing your student loans easier by replacing your multiple loans with a single loan. This means that instead of managing multiple monthly payments from multiple servicers, you will have to manage just one payment from a single servicer.
Need help keeping track of your student loans? Download our free Student Loan Spreadsheet!
2. Consolidation can lower your monthly payment.
If you are having difficulty making your existing student loan payments, consolidating your student loans can make things a little easier by lowering your monthly payments in exchange for a longer repayment term (up to 30 years).
By reducing your monthly student loan payment, you might find it a little easier to pay off other, more costly debt, build an emergency fund, or make an important purchase like a car or home.
3. Consolidation may give you access to important benefits.
Federal Direct Loans already have access to income-driven repayment plans, which can help to lower your monthly payments and offer some powerful student loan forgiveness options. But other loans, like Stafford Loans, Federal PLUS Loans, and Perkins Loans, do not have access to these income-driven repayment plans.
If you have these other types of federal student loans, and you choose to consolidate them, you will gain access to these income-driven repayment plans and all of the benefits that come along with them.
4. Consolidation can convert variable-rate loans into fixed-rate loans.
Because Direct Consolidation Loans have a fixed interest rate, if any of the student loans you are consolidating have a variable interest rate, by undergoing consolidation they will, in essence, become fixed-rate loans. This means that if rates rise in the future, you won’t have to worry about paying more each month.
In addition to potentially saving you money, this also makes anticipating your loan payment amounts much easier: What you pay next year will be the same as you pay this year.
5. Consolidation gives you more options for consolidation and deferment.
Student loan deferment and forbearance are two really powerful tools for borrowers who find themselves unable to make their monthly payments. Unfortunately, there is a limit to how long you can defer your student loan payments—typically, three years.
If you have already used all of your allotted deferment /forbearance time, consolidating your student loans will resent the clock and give you the option to place your new consolidation loan into deferment or forbearance if you need to.
6. Consolidation can help you avoid default.
Because of all of the benefits above, especially lowered monthly payments and a reset deferment/forbearance clock, consolidating your student loans can help you avoid defaulting on your loans.
Default is a major concern for borrowers unable to make their monthly payments, as it comes with some pretty significant repercussions. In addition to damaging your credit score and making it more difficult to qualify for other types of debt (like credit cards, auto loans, and mortgages), defaulting on your student loans can lead to lost tax refunds, wage garnishment, and a lot more.
If you worry that you may be forced to default on your student loans, consolidation might be just the thing to keep you afloat.
Cons of Consolidating Your Student Loans
Here are some of the reasons that you might ultimately decide that consolidating your federal student loans doesn’t make sense for your personal financial sutuation and goals.
1. Consolidation might increase your total interest payments.
Usually, consolidation will increases how long you have to repay your student loans. Though this may decrease your monthly payments and make it easier to make those payments, the increased repayment term means you will likely pay more in interest than if you simply repaid your loans according to the original repayment schedule.
If you decide that consolidation is right for you, you can counteract this by making larger monthly payments and paying your consolidation loan off ahead of your new schedule. The faster you can pay it off, the more money you will save.
2. Consolidation may add to your principal.
If any of the federal student loans you are consolidating have outstanding interest, that interest will become a part of the principal of your new consolidation loan. (This is similar to interest capitalization.) This means that you will be paying interest on a higher principal than your original student loans, which can add thousands of dollars to your total repayment amount.
If you would like to consolidate your student loans, you can avoid this capitalization by paying off any outstanding interest before you begin the consolidation process.
3. Consolidation might cause you to lose certain benefits.
Though consolidation might grant you certain new benefits and protections, it can also cause you to lose other benefits. Depending on the exact types of student loans that you are consolidating, you could lose access to certain student loan cancellation options, interest rate reductions, principal rebates, and more.
4. Consolidation will reset the clock on student loan forgiveness.
Student loan forgiveness is a powerful tool that many borrowers plan to make use of when they take out their student loans, whether by working in public service for a certain number of years or by opting into an income-driven repayment plan where your student loan balance is wiped out after you make a certain number of payments.
Consolidating your student loans will cause these clocks to reset, meaning that any credit you’ve already accrued by making your payments will be lost. This is a very important thing to keep in mind if you are considering consolidation.
5. Consolidation won’t lower the interest rate on your student loans.
Many borrowers think that consolidating their student loans will lead to a lower interest rate, but the truth is: That’s not how consolidation works.
If you consolidate your federal student loans, your new loan will have an interest rate that is equal to the weighted average of all of the loans that you’re combining, rounded up to the nearest one-eighth of one percent. This means that, in the best case scenario, your new interest rate will be equal to your existing rate; in a worst case scenario, it could be slightly higher due to rounding up.
6. You can’t consolidate your private student loans.
This was already discussed, but it bears being repeated: Only federal student loans can be consolidated. Private loans cannot be merged into a consolidation loan.
So, if you’re thinking about consolidating your student loans to make repayment less confusing, but you have many different private loans with different lenders, consolidation might not be able to do what you’re hoping it will do.
If you’d like to merge your private student loans into a single new loan, refinancing your private student loans might be a better option.
7. If you consolidate, you can’t pay off loans with higher interest rates.
Often, when borrowers decide that they want to get serious about paying off their student loans, they’ll choose to follow a specific student loan repayment strategy that will help them meet their goals.
For example, if you wanted to save as much money as possible you might choose to pay off your loans with the highest interest rate first. On the other hand, if you wanted to free up some room in your budget, you might decide to pay off the student loan with the lowest balance first.
By consolidating your student loans, you’re removing your ability to do this. Because consolidation replaces your multiple loans with a single new loan, you can only apply payments to that loan.
If you wanted to consolidate your student loans but were hoping to reduce your interest rates first, you might consider first paying off those student loans with the higher interest rates before consolidating. By doing this, you remove those high-interest loans from the equation, effectively lowering your weighted average. Even if you couldn’t pay off those high-interest loans, you could choose to consolidate all of your loans except for those, and pay them off separately.
Steps to Take if Consolidation Isn’t Right For You
Only you can decide whether or not consolidating your student loans will make sense for your unique financial situation and goals. While it can bring a lot of good in making your student loans a little bit easier to manage, it can also bring some negatives which need to be considered.
If, after weighing the pros and cons listed above, you decide that student loan consolidation isn’t for you, there are still some steps that you can take to make repaying your multiple student loans a little bit easier.
The first thing you should do is commit to keeping track of your student loans, whether that’s by using a student loan spreadsheet or by signing up for an app or service that will keep track of your loans for you. By simply tracking your progress as you repay your student loans, you can dramatically decrease the chances that you’ll miss a payment, and you’ll have a better sense of the total amount that you owe.
In addition to tracking your progess, you should consider signing up for autopay. As long as you’ve got a steady paycheck and know you’ll have money each pay date, signing up for autopay means you’ll never miss a payment again. And it might even decrease your student loan interest rate by 0.25%. That might not seem like a lot, but depending on exactly how much you owe it could easily save you hundreds or thousands of dollars over the life of your loan.