Consolidating Student Loans: Pros And Cons

Before you consolidate your student loans, make sure you understand how consolidation works -- and what pitfalls to avoid.

Consolidating your student loans may make it easier for you to live with them.

At best, it could:

  • reduce your monthly loan payments,
  • cut your interest rate, and
  • ease the burdens of recordkeeping, and
  • qualify you for loan forgiveness programs.

At worst, it won't help with any of these concerns -- and it could cost you important benefits associated with your federal student loans.

If you're considering student loan consolidation, it's essential that you know the terms of your existing loans and understand how consolidation works before you proceed. 

What Is Student Loan Consolidation?

  • Loan consolidation is a process that lets you replace multiple student loans with a new loan from a single lender.
  • The interest rate on the consolidation loan will be based on the average interest rates of all the loans that you consolidate.

EXAMPLE: If you consolidate a $5,000 loan at 6.8% interest and a $10,000 loan at 6.0% interest, your new interest rate will be $6.375%.

  • Consolidation rules depend on whether the underlying student loans are federal loans -- such as Stafford, Direct, or Perkins loans -- or privately made.

Federal Loan Consolidation

Federal student loans -- but not state-based or private loans -- can be consolidated through the Direct Loan Consolidation Program. You can use this program to consolidate almost any kind of federal student loan, including:

  • Stafford or Direct Loans (whether subsidized or not)
  • Supplemental Loans for Students (SLS)
  • Federally Insured Student Loans (FISL)
  • FFEL or Direct PLUS Loans*
  • Federal Perkins Loans
  • Federal Nursing Loans
  • Health Education Assistant Loans (HEAL), and
  • some existig consolidation loans. 

* PLUS loans can be consolidated only by the parent who took out the loan. In other words, if you're a parent who took out a PLUS loan, you can consolidate it with your other student loans. But if you're a student and your parent took out a PLUS loan for you, you can't consolidate it with your own student loans.

Usually, you can apply for a federal consolidation loan at any time after you graduate, leave school, or drop below half-time enrollment. You can consolidate a loan in default only if you meet certain requirements

To apply for a federal consolidation loan, you must use the website, using the process described on the U.S. Department of Education website.

Private Loans

You can't include private student loans in a federal consolidation loan. You may be able to obtain a private consolidation loan, however. Lenders offering private consolidation loans include Student Loan Network, Wells Fargo, and others listed in this helpful table on the FinAid website

Before you apply for a private consolidation loan, you should thoroughly investigate its terms, staying alert for any of the pitfalls described below. You're signing a contract that could last up to 30 years, so you'll want to understand it well.

Benefits of Student Loan Consolidation

You'll have just one loan servicer and just one payment -- or maybe two. If you have loans scattered among different lenders and servicers, a consolidation loan can bring them together in one easy-to-manage place. This is especially true for older federal loans made before the Direct Loan program streamlined the loan servicing process.

The big caveat here: Don't include federal student loans in a private consolidation loan. If you do, you'll lose the big benefits associated with your federal loans (see below). If you have a mix of federal and private loans and you want to consolidate, you should get a separate consolidation loan for each type.

You may be able to reduce your monthly payments. When you consolidate your loans, you may be able to extend the repayment period for up to 30 years. This lowers the amont you owe each month. It will also increase the amount of interest you pay over the life of your loan (see below).

You may get lower interest rates for older federal loans. If you consolidate federal loans made before July 1, 2006, you may be able to reduce your interest rate by locking in variable rate loans at a lower fixed rate. This benefit disappears for newer loans because, as of July 1, 2006, interest rates on federal loans were fixed. Be certain you know the interest rates of all your loans before you consolidate. A locked-in, average interest rate could work against you if you have a greater percentage of loans at a higher rate; that will increase the rate on your lower-interest loans and remove the option of tackling your high-interest loans first. (Again, try the FinAid Loan Consolidation Calculator to see what your new interest rate would be.)

You may qualify for lower interest rates for private loans if your credit score has improved. If you have private fixed-rate loans, there may be a way to lower your interest rate through consolidation. If your credit score has changed for the better since you took out your loans, you may qualify for better terms.

Downsides of Student Loan Consolidation 

You'll pay more interest over time. When you consolidate your loans, you may extend the repayment period and lower your monthly payments. This is great in the short term, but it means that you'll pay more interest over the life of the loan. 

EXAMPLE: If you have $20,000 in federal loans at an interest rate of 6.8% and you plan to pay them off in 10 years, you can expect to pay about $230 per month and a total of $7,620 in interest. If you stretch the term to 20 years, you'll reduce your monthly payment to about $153, but you'll pay almost $16,640 in interest over the life of the loan. (You can use the FinAid Loan Calculator to plug in numbers for your loans, when you do, you'll see how much extra interest you'll pay if you extend the life of your loan from 10 to 20 or 30 years.)

You may lose rights and benefits. If you consolidate federal loans with a private lender, you'll lose the critical benefits of federal loans, including deferment, forbearance, and most cancellation options, plus your rights to affordable payments. If you stick to the federal loan consolidation program, you'll keep full benefits on most of your loans. (There may be some changes, however. For example, you may lose the generous forgiveness benefits of federal Perkins loans if you consolidate them with other federal loans. This is why it's important to read the loan consolidation rules and terms carefully.)

You risk fewer repayment options for PLUS loans. If you're a parent who borrowed PLUS loans for your child and you consolidate them with student loans of your own, you may lose flexible payment options on your other loans. To maintain maximum benefits, you may want to exclude the PLUS loans from your consolidation package and pay them separately.

You may lose the option to consolidate later. Consolidation can be a big help, but it's important to time it right. You will usually get just one opportunity to use the federal consolidation loan program. The U.S. Department of Education website explains the rule and exceptions.

Rogue companies may try to take advantage of you. It costs nothing to apply for a Direct Consolidation Loan. Don't believe anyone who tells you otherwise. To apply for a Direct Consolidation Loan, you must follow the process described on the U.S. Department of Education website.

Private consolidation loans may include prepayment fees. If a private consolidation lender wants to charge you a penalty for paying off your loan early, look elsewhere. You should be able to find a consolidation loan with better terms.

Learn More

For links to more calculators to help you manage your loans, see "The Best Student Loan Calculators."

If you're struggling to make payments and want to learn about your options, see "What If I Can't Pay My Student Loans?"

For information on dealing with loans in default, see "Student Loans in Default: What Should I Do?"

If you're struggling with a lender or loan servicer, see "How to Get Help With Student Loan Problems."

Jurisdictional relevance: US

Legal Consumer - CaliforniaLaw. The content of this article pertains to all US states and counties.