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Advantages and disadvantages of student loan consolidation


Consolidating your student loans involves combining some or all of your federal loans into one direct consolidation loan. By doing this, you will end up with one monthly payment instead of several with different interest rates.

Consolidation is a great way to get your monthly payments under control, and in some cases it’s a necessary step to access federal student loan repayment and forgiveness plans. However, there are times when consolidation might not be the best idea.

Benefits of Student Loan Consolidation

Consolidating student loans is a smart step for many federal borrowers; here are some of the benefits:

  • Potentially lower monthly payments: Direct consolidation loans have a repayment term of up to 30 years, as opposed to the standard repayment period of 10 years. This longer repayment term can make your loans more manageable by reducing your monthly payment.
  • One payment per month: Instead of making multiple student loan payments on your federal loans, you’ll make one each month. While this decision helps you avoid late payments, your credit score could also increase over time.
  • Access repayment plans: Some older student loans, such as FFEL loans and Perkins loans, are not eligible for certain income-based repayment plans or the Public Service Loan Relief (PSLF), unless they be consolidated. The combination of these loans in a direct consolidation loan would open access to these programs.
  • Retain federal benefits: While some borrowers may consider refinancing their loans with a private lender as a way to combine multiple loans, choosing to consolidate instead ensures that you retain federal benefits such as forbearance, repayment contingent on income, and COVID-19 relief.

Disadvantages of Consolidating Student Loans

Although consolidation can be a useful tool, there are still some drawbacks to be aware of before making the decision:

  • Pay more interest over time: Choosing to pay off your loan over 30 years will lower your monthly payment but cost you more in interest over time. You will also be in debt for a longer period of time, which could affect other aspects of your finances.
  • No interest rate cut: The main appeal of refinancing is that you can often find a lower interest rate than what you are currently paying. With consolidation, your interest rate is calculated as the weighted average interest rate of the loans you consolidate, rounded to the nearest eighth of a percent. Because of this, your interest rate might be slightly higher than what you are currently paying.
  • Losing progress to federal pardon programs: Consolidating your loans could cause you to lose any progress you’ve made on federal programs like the PSLF or an existing income-based repayment plan.
  • Interest is added to your balance: If you have any outstanding interest on the loans you are consolidating, this interest will be added to your main balance when consolidating. Interest will then accrue on this higher balance.

Should I consolidate my student loans?

Consider loan consolidation carefully. Whether or not to consolidate your student loans depends on the type of loan you have and your financial situation.

You need to consolidate if:

  • You have old FFEL or Perkins loans and want to get a loan forgiveness.
  • You are having difficulty keeping track of your monthly payments.
  • You have significant student loan debt.

You should reconsider consolidation if:

  • You don’t have a lot of student loans.
  • You are about to meet the requirements for a loan forgiveness program.
  • You can repay your loans quickly.

Can I consolidate my private student loans?

You cannot consolidate private student loans, as consolidation is done by the US Department of Education. However, you can refinance your private student loans, which is a similar process in theory – you’ll be swapping multiple private loans for a new loan. This could help you manage multiple payments or get a lower monthly bill.

Should I refinance or consolidate my federal loans?

One of the biggest benefits of student loan consolidation is that it keeps your federal student loans with the federal government. While consolidation doesn’t necessarily save you money, it does ensure that you retain access to things like the COVID-19 forbearance period and loan cancellation options.

That being said, some borrowers may choose to refinance instead of consolidate. When you refinance, your federal loans will convert to private loans, so you will lose federal benefits. However, refinancing could allow you to get a much lower interest rate on your loans, which could help you pay them off faster and at a lower cost.

Next steps

Before applying for a direct consolidation loan, consider what you stand to gain and lose. Once you have assessed your financial situation and decided that consolidation is the path you want to take, you apply through a online application on the Federal Student Aid website.

If you are unable to determine your next move, the Department of Education loan simulator can help you decide whether to consolidate or not. You can also run the numbers with a refinance calculator to better compare the impact on the cost of your loan.

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