Should I consolidate my student loans?

Student loan consolidation has its pros and cons. Here is how to determine if the move is right for you and your financial health.


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Nearly 45 million Americans collectively have over $1.6 trillion in student debt. And these numbers are growing. If you are one of the millions with some form of student loan debt, you may have considered student loan consolidation, which allows you to combine all of your student loans into one loan with one payment.

There are a couple of ways to go about consolidating student loan debt. We will help clarify options for student loan consolidation and who qualifies, so you can decide if it makes sense for your unique situation.

Related: 4 tips for repaying federal student loans

Student Loan Consolidation Explained

Nearly 45 million Americans collectively have over $1.6 trillion in student debt.

Student loan consolidation is designed to combine all student loans and make repayment more manageable.

Essentially, a lender pays off all of your debt with a larger loan and then combines each student loan into one payment plan with a single interest rate and consistent payment schedule.

The amount you borrow covers the principal balance on all of the student loans you consolidated. With the new loan, you’ll receive a new interest rate, which is determined by your credit score and/or other factors your lender assesses before lending the funds.

Ways to Consolidate Student Loans

There are two common ways to consolidate student loans. The U.S. Department of Education offers the Direct Consolidation Loan for borrowers with federal student loans. (Essentially, even if you exclusively have federal student loans, you might be making payments to more than one loan servicer.)

If you stay within the federal student loan system, consolidating doesn’t usually save you money; it simply combines multiple loans into one. Your new interest rate is a weighted average of all your loans’ interest rates, rounded up to the nearest eighth of a percentage point. Federal loans consolidated through a Direct Consolidation Loan remain federal loans.

This could be particularly useful for borrowers who are pursuing federal loan forgiveness or who are enrolled in one of the more flexible federal student loan repayment plans, such as an income-driven repayment plan.

The other option is to refinance student loans with a private lender with new terms and a new interest rate. (To lessen confusion, private loan consolidation is typically referred to as refinancing.) Borrowers use a new loan to pay off one or more existing student loans. Depending on the borrower’s eligibility, which varies from lender to lender, it’s possible to receive a lower interest rate or more favorable terms.

As you ask yourself, Should I consolidate my federal student loans? And when should I consolidate my student loans? The answers depend on a number of factors.

Pros of Student Loan Consolidation

There are a few reasons to consider student loan consolidation either with a Direct Consolidation Loan or refinancing through a private lender. Here are a few advantages worth considering.

Simplified Repayment

Whether you choose Direct loan consolidation or refinancing of multiple student loans, your loan repayment should be simplified. Managing multiple student loan payments may increase your chances of missing a payment. In general, if your payment is over 30 days late, it could affect your credit score, according to Experian. Worse, defaulting on your student loans may have serious negative effects on your credit score and financial stability.

Thus, consolidating loans into one, with one monthly payment, can help to eliminate the margin of error and may make repayment more manageable.

Interest Rate

When an applicant is interested in refinancing, private lenders will review their credit score and history, as well as other financial information, to determine the interest rate and terms. While requirements may vary by lender, applicants who meet the lender’s criteria may qualify for better rates and terms, thus saving money over the life of the loan.

With federal Direct loan consolidation, as mentioned earlier, a borrower’s interest rate is a weighted average of current loan rates rounded up to the nearest one-eighth of a percentage point, which means this doesn’t typically result in savings for the borrower.

Federal and Private Loans May Qualify

Whether you have federal or private student loans, there are several options in order to consolidate. For a borrower who exclusively has federal loans, a Direct Consolidation Loan may work best. But those who have a combination of federal and private loans can partner with a private lender to refinance.

It’s important to note that some lenders refinance only private student loans, so it might be a good idea to be sure a lender has the option available for both.

Flexible Loan Terms

Student loan consolidation allows you to change the duration of your loan. You may begin with a 10-year repayment plan, but when you consolidate or refinance you might choose to change the term of your loan.

You can choose to shorten the life of the loan, such that you pay it off sooner, or extend the life of your loan, which can reduce monthly payments (but add up to more total interest).

Cons of Student Loan Consolidation

Even though there are benefits of student loan consolidation, there are also drawbacks. Here are a few to be aware of before consolidating loans.

Disqualification From Federal Repayment Programs

Refinancing federal student loans with a private lender disqualifies you from federal repayment programs, including the Public Service Loan Forgiveness Program (PSLF) and income-driven repayment plans.

Borrowers will also be disqualified from federal benefits such as forbearance and deferment options, which allow qualifying borrowers to pause payments in the event of financial hardship.

Some private lenders have hardship programs in place, but policies are determined by individual lenders.

Possible Fees

While there is no application fee for the federal debt consolidation loan, private lenders may charge a fee to refinance loans. Fees associated with refinancing student loans are determined by the lender.

May Not Save Money

If you choose the Direct Consolidation Loan, generally you won’t see any savings. Because your new interest rate is a weighted average of your current loans, rounded up to the nearest eighth of a percentage point, you will probably pay around the same amount you would have paid if you didn’t consolidate.

If you extend your term, you may see your monthly payment decrease, but your total interest payments will increase.
On the other hand, if borrowers choose to consolidate and refinance with a private lender, they could end up reducing their interest, thus saving money over the term of the loan. Or they could opt to lower monthly payments by extending their term, making budgeting more manageable, but as mentioned above increasing the total amount of interest paid.

Considerations for Student Loan Consolidation

A Direct Consolidation Loan can be a solid option for some federal student loan borrowers, but it won’t be the right choice for everyone. The same can be said for refinancing with a private lender. Consolidating student loans via refinancing could be a good solution for those who have a steady income and good credit, among other financial factors.

For borrowers who meet the lender’s requirements and want to try for a better interest rate or pay off their student debt faster, or if they want to combine private loans and/or federal loans into one new loan, refinancing with a private lender could be worth considering.

On the other hand, because federal student loans have a fixed interest rate that is generally on the lower end of the spectrum, there’s a good chance a private lender will not offer a lower rate.

Direct Consolidation Loans could be a good choice for those who want to organize and simplify their loan repayment, yet want to still be eligible for federal loan benefits like forbearance or deferment. They can consolidate their loans just one time.

Other Ways to Tackle Debt

Student loan consolidation might not be the right fit for everyone. Debt repayment options include the “snowball method,” popularized by financial self-help guru Dave Ramsey, in which you pay off debt from smallest to largest, while making minimum payments on all other debt, gaining momentum as you knock out each balance.

The idea is that by tackling smallest balances first, it may give borrowers a feeling of accomplishment that increases their motivation to pay off the next biggest debt and, eventually, tackle all existing debt.

Another option is the “ladder” strategy, also known as the debt avalanche method. Unlike the snowball method, which focuses on behavior and motivation, the avalanche method is about streamlining debt repayment in order to help save the most money on interest. You start with the loan or credit card that has the highest interest rate and work your way down to the one with the lowest interest rate. Again, you’d also make minimum payments on all other debt.

With the snowball method, you pay off debts from smallest to largest.

Using this strategy may require more discipline, and the initial results may sometimes seem less tangible. But if users of the method keep track of how much they’re saving in interest, motivation may increase.

Last, the “snowflake” method involves identifying sources of income beyond one’s usual income to help pay off debt faster. This can include side gigs and other part-time work.

Borrowers who have federal student loans can also consider deferment, forbearance, or applying for an income-driven repayment plan. Though each plan can assist borrowers encountering financial hardship, they don’t necessarily help save on interest.

Selecting a debt repayment strategy that fits individuals’ needs may help them take better control of their debt without having to consolidate their loans.

Taking Steps Toward Consolidation

Understanding student loan consolidation options can help in making an informed decision about repaying student loans.

Borrowers interested in refinancing student loans might want to consider evaluating a few options, because requirements—as well as interest rates and loan terms—can vary from lender to lender.

Refinancing federal student loans will eliminate the federal protections and benefits offered with federal loans, but some private lenders may offer their own benefits and protections.

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