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Updated on Tuesday, December 4, 2018
Student loans are rarely simple. From choosing the right repayment plan to understanding how interest works, it’s easy to get confused.
It also doesn’t help that most students hold several student loans from multiple loan servicers. According to a 2017 Experian report, the average student loan borrower leaves school with 3.7 loans in their name.
If this describes you, you might be struggling to keep track of your various accounts and payments. Fortunately, there’s a solution that could help simplify matters: student loan consolidation.
This guide will explain what it means to consolidate student loans, along with the pros and cons of this a move. If you’ve been wondering “Should I consolidate student loans?”, read on to find your answer to that and other questions.
What is student loan consolidation?
Student loan consolidation involves combining multiple federal loans into one, using a direct consolidation loan. If you go this route, you’ll only have to worry about a single loan — with a single interest rate and single payment — instead of dealing with several student loan bills each month.
Your new interest rate will be the weighted average of your previous interest rates rounded up to the nearest one-eighth of a percent. Since your new rate is weighted, it’s pretty much the same as what you were dealing with previously. It will also be fixed, meaning the interest rate will stay the same over the life of your debt.
Along with simplifying repayment, consolidation can also make certain loans eligible for income-driven repayment plans. Plus, consolidating your student loans allows you to choose new repayment terms and even select a new loan servicer if you don’t like your old one.
Note that direct consolidation is a federal program, so only federal student loans, like direct loans (or Stafford loans) and parent PLUS loans, are eligible — you cannot include private student loans in federal consolidation.
Potential benefits of consolidating student loans
Direct loan consolidation comes with a variety of advantages for borrowers. Here are six of the most important ones:
1. Simplifying repayment by combining several loans into one
As its name suggests, consolidation is all about combining several loans into one. When you have a bunch of loans, it’s not hard to lose track of the different accounts and bills that make up your debt. Missing a payment could cause your debt to become delinquent — or worse, to go into default. Default could hurt your credit score and even lead to wage garnishment, not to mention being very stressful.
The simple act of consolidating loans could make it easier to track your debt and keep your repayments going out on time. You’re less likely to forget a student loan bill if you only have one to pay.
2. Lowering your monthly bills with new repayment terms
When you apply for direct loan consolidation, you have the chance to choose new repayment terms. For instance, you could put your loans on an income-driven repayment plan or extended repayment plan, either of which can lengthen your terms to 20 or 25 years.
By adding years onto your term, you can drastically cut your monthly payments. If your payments have become too burdensome, this approach could give you some breathing room.
Of course, the trade-off is that you’ll be in debt for longer and therefore will pay more interest overall. But lowering your monthly payment might be what you need to save your budget, at least until you start making more money in the future.
3. Making your loans eligible for income-driven repayment
Consolidating student loans also has the benefit of making certain loans eligible for income-driven repayment.
In most cases, parent PLUS loans, Stafford loans and federal family education loans are not eligible for income-driven repayment unless you consolidate them first. Note that parent loans only qualify for one of the four income-driven plans — Income-Contingent Repayment (ICR) — after you consolidate them.
So if you need income-driven repayment to adjust your monthly payments, you might be required to consolidate before you can select one of these plans.
4. Switching to a new loan servicer
Besides allowing you to choose a new repayment plan, consolidating also lets you select a new loan servicer. The federal student loan servicers currently include Great Lakes, Navient, Nelnet and others.
You can, of course, stick with your current loan servicer — but if you’ve have problems with your servicer, you do have the option to get a fresh start with a new one.
5. Get a fixed interest rate on your old student loans
These days, federal student loans all come with fixed interest rates, which remain the same over the life of your loan — but if you borrowed years ago, your student loan might have a variable rate. Variable rates can fluctuate over time, costing you extra money in interest. If you’d prefer a fixed interest rate, consolidating could help you get it.
6. Rehabilitate student loans that have fallen into default
Finally, consolidating federal student loans is one strategy for getting your student loans out of default. If your loans are in default, you can rehabilitate them through consolidation if you agree to pay the debt back on an income-driven plan or make three on-time payments first.
Potential drawbacks of consolidation
Although consolidation can have a variety of benefits, it’s not for everyone. Consider these four possible downsides of consolidating before making changes to your student loans.
1. You might spend more on interest overall
If you lower your monthly payments by consolidating, you could end up spending more money on student loan interest overall. When you choose a longer repayment term, your debt has additional years to accumulate interest.
Let’s say you borrow $25,000 at a 5.05% rate. After 10 years, you’d pay $6,893 in interest. But if you double the term, then after 20 years you’d end up paying $14,763 in interest, more than twice the amount.
So even though a longer repayment term offers financial relief in the short term, it could actually cost you a lot more in the long run.
2. You might reset the clock on your eligibility for student loan forgiveness
Federal student loans come with a number of government-backed protections and benefits, including the opportunity to receive student loan forgiveness.
Programs like Public Service Loan Forgiveness (PSLF) promise to wipe away your college debt after a given number of years of qualifying work. Alternatively, you could get your balance forgiven after 20 or 25 years of repayment on an income-driven plan.
However, consolidating during that time could reset the clock on your path to loan forgiveness. If you’re already five years into your service for PSLF or your repayment on an income-driven plan, consolidating could bring you back to square one.
That said, sometimes you may need to consolidate before you’re eligible for either program anyway. If you stayed on the standard 10-year plan and were aiming for PSLF, for instance, you’d have nothing left to forgive after 10 years. Just make sure you consolidate at the beginning, rather than waiting years and having to start from scratch.
3. You have to be careful about consolidating Parent PLUS Loans
In most cases, parent PLUS loans and other educational debt taken out by parents aren’t eligible for income-driven repayment unless you consolidate them first. But you’ll need to be careful about consolidating a student loan you borrowed for your own education together with one you borrowed on behalf of your child.
Your own student loans might qualify for a variety of repayment plans, but a consolidated loan that contains a parent loan will only qualify for ICR. So be careful about combining personal debt with parental debt, as it could leave you with fewer options for repayment.
4. Your private student loans aren’t eligible
A final downside of direct loan consolidation is that it doesn’t work for private student loans. If you borrowed from a private lender, such as a bank or online provider, you won’t be able to combine your loans through federal loan consolidation.
Direct loan consolidation is different from student loan refinancing
Federal student loan consolidation isn’t the only way to combine your loans into one. You can also achieve this by refinancing with a private lender.
When you refinance, you can take multiple loans — whether federal or private — and exchange them for a new loan with a new rate.
As long you meet requirements for credit and income, you could snag a lower interest rate and save money on your debt.
You can also choose new terms, perhaps lengthening it to lower your monthly payment or selecting a shorter term to get out of debt more quickly.
But just like with federal consolidation, private refinancing also has potential downsides.
For example, when you refinance federal student loans, you turn them into a private one. As a result, you lose access to federal plans and programs like income-driven repayment, PSLF and federal deferment and forbearance.
If you don’t need any of these federal options, this sacrifice might not be a big deal. But if you’re worried about paying back your loan or are aiming for loan forgiveness, refinancing with a private lender probably isn’t the right strategy.
If you do decide to refinance, make sure to shop around and compare offers from multiple lenders — that way, you can find a refinanced student loan with your best terms and lowest rate.
Should I consolidate my student loans?
Whether you’re considering federal consolidation or private refinancing, don’t rush into your decision. You should first familiarize yourself with all the pros and cons before making changes to your debt and weigh both the short- and long-term consequences.
If you’re looking to simplify repayment or make your loans eligible for an income-driven plan, consolidation could be the right approach. But if you’re seeking a lower interest rate, refinancing could be the better option.
Whatever you choose to do, keep chipping away at your debt with on-time monthly payments. Although your loans might take years to pay off, eventually you’ll send off that last payment and be free of your student debt.