Updated December 7, 2017

Should You Consolidate Your Student Loans?

Consolidating your student loans may make your payments easier and could lower your interest. But is it always a good idea? We discuss the pros and cons.

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It isn't unusual to pay hundreds of dollars a month in student loans. If you graduated more than six months ago, your loans are likely in the repayment period. This means you owe monthly payments. Whether you kept a tally of the totals or not, reality will settle in quickly.

Why You Should Consolidate Your Student Loans: Do you have federal student loans with different servicers and several monthly payments?

Student loan consolidation may help to lower payments and pay only one monthly bill. With consolidation you may be eligible for a repayment plan of up to 30 years. As a bonus, you will be able to switch any variable-rate loans to fixed interest rate loans. Sounds simple right? Watch out there are common mistakes to avoid before choosing consolidation. Read on.

Just starting out in life is tough enough. Now you must figure out how to pay multiple student loan bills? You have options. One is to consolidate your student loans. Don't confuse this term with student loan refinancing, though. They mean two different things. We'll discuss the difference later in the article.

Not paying your bills has serious consequences, but not paying your federal student loans may be far worse.

  • You could hurt your credit score; letting your federal student loans enter default from nonpayment could cause your credit score to drop by roughly 200 points.

  • Avoiding paying your federal student loans may also ruin your chances of using any federal programs in the future.

First, we focus on student loan consolidation: how it works and the pros and cons of doing so.

Federal Loans

Look at your current loan documents. Do you have federal loans or private loans? You may have a combination of the two.

For simplicity, we will focus on federal loans only right now. We will talk about private loans later in the article. Among the student loan programs, the following are often eligible for consolidation:

Some loans are usually ineligible for consolidation. They include PLUS loans made to parents and any private student loans.

Tip: You can obtain the Federal Direct Consolidation Loan for free. The Department of Education handles the process through an online login that you created when signing your promissory note for the loans. You will apply directly through them.

Private lenders may offer help with consolidation. They may be offering their own program, though. Make sure you know who you are working with before providing information or money. Keep in mind in the current marketplace of spam and phishing the federal government will only contact you regarding loans and consolidation through mail and phone.

What Does Student Loan Consolidation Mean?

Now, let's look at what student loan consolidation means. Just like any other consolidation program, it brings multiple loans together.

The Department of Education pays your current loans off and starts one new big loan for you. As a result, you have one monthly payment versus many payments with varying dates and amounts.

How to Qualify for Student Loan Consolidation

Student loan consolidation requires certain factors to qualify. First, you must not be enrolled in school more than half-time; as you are eligible for deferred payments while attending class. You don't have to be a graduate. If you stopped going to school, you may still qualify for the benefits of a consolidation.

Next, you need specific loan types to qualify. At least one loan must be a Direct loan. There are several loans in the Direct Loan Program. It is one of the largest student loan programs available. In the program you will find:

  • Direct Subsidized: Loans for students who demonstrate financial need. In this case, the Department of Education covers the interest on the loan. They do this while you are in school and for six months after you graduate. In some cases, they may also cover it if you get your loans deferred.

  • Direct Unsubsidized: Loans for students who do not demonstrate financial need. You pay the interest on the loan without help from the Department of Education. You don't have to start paying it until the repayment period, though.

Deferment: Refers to a period where you don't have to make student loan payments. In some cases, you can reduce the amount you pay rather than stop paying. During this time, interest doesn't accrue on Direct or Stafford Subsidized Loans, Perkins Loans, and the subsidized part of Direct Consolidation and FFEL loans. Interest still accrues on all other federal loans. You can choose to pay the interest only during the deferment or have it added back to the balance of the loan. Deferments are given for economic hardship, unemployment, and returning to school you are given three years of deferment time to be used in six-month increments.

Repayment Period: This period begins six months after you graduate school or stop going to school. It is when your student loan payments begin unless you made other arrangements.

Other requirements include:

  • Your loan must be in the grace period or in repayment.

  • If your loan is in default, you must make arrangements to bring it current. Default occurs when you have not made a payment on your loan in 270 days, default into collections with the federal government occurs at 360 days past due. Usually this means making 3 timely payments in a row before you can consolidate. If you can't become current, you will need to apply for one of the Loan Forgiveness plans. You do this along with applying for the consolidation loan.

Determining the Interest Rate

You are probably wondering, what's the interest rate? Isn't that the whole point of consolidating? You want to pay less interest. This is a double-edged sword, though. Yes, you may secure a lower interest rate than some of your loans, but not all. This is not a refinance - it's a consolidation.

The Department of Education determines your interest rate as follows:

They take a weighted average of your current student loan interest rates. They then round the result up to the nearest 1/8th. For example, a 4.65% would round up to 4.75%.

Like we said, this rate may be lower than some of your loans, but not lower than the lowest rates.

Something important to remember, though, is that you may extend the term of your loans. If you do, you extend how long you pay interest. While the rate may be lower, the longer you pay interest, the more you pay.

If it's what's affordable, then so be it. Just make sure you are aware of the full cost of the loan over its entirety.

Fixed Interest vs Variable: Both variable and fixed interest rate loans can be beneficial. Fixed interest rate loans maintain the same interest for the life of the loan. This can prove helpful if you need a longer loan repayment period. Variable interest rates may start lower than a fixed rate loan, but may increase over time. A variable loan may prove to be the better option if you can repay your loans in a shorter period. The difference is simple: variable interest rate loans will continue to change and a fixed interest rate loan will stay the same (unless you refinance).

Pros and Cons of Student Loan Consolidation

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There are several pros and cons of student loan consolidation. We discuss both below.


  • It may be easier to stay organized and on time with your payments. A single loan servicer and one payment versus several loan payments per month can make a big difference to you.

  • Your one payment may be lower than the total payments you made before consolidation.

  • You may have the option to take advantage of a Loan Forgiveness Plan. Many federal loans are ineligible for loan forgiveness without a Direct Consolidation loan.

  • Consolidation could help you stay current on your student loans. This may make you eligible for other federal programs. A few examples include loan forgiveness, forbearance and deferment.

Income Driven vs Deferment: The federal student loans you have start with 3 years of deferment time. Deferments are useful in times of financial strain such as; job loss, a return to school or a hardship. An Income Driven Repayment (IDR) plan offers you low monthly payments valid for 12 months. Both deferments and IDRs can help you to lower payments and pause interest. The biggest difference is that the IDR may result in loan forgiveness and a deferment is a temporary fix.

Forbearance: Refers to a temporary period when you don't have to make student loan payments. It is usually a result of a sudden loss of income or financial hardship. For example, if you fell ill and became hospitalized, you may not be able to pay your loan. Putting it in forbearance until you are back on your feet may help. When you sign the promissory for your federal student loans you are granted three years of forbearance time through the life of your loans. You may use a forbearance for up to twelve months at a time- check with your loan servicers as some have stipulations about usage.


  • You may stretch out the repayment period. This may mean paying more interest over the life of the loan.

  • Consolidating some loans, such as the Parents PLUS loan into the Direct Consolidation loan, may make you ineligible for a loan forgiveness program.

  • You may lose lender specific benefits that pertain to your loan. A few examples include discounts on interest rates or loan cancellation.

  • Qualifying payments you already made for loan forgiveness may get erased. This means the clock starts ticking again. Most loan forgiveness programs require you to make 120 loan payments before you can have any of your loans forgiven.

Tip: Before you consolidate any student loans, talk to your loan servicer. You can revisit any benefits you may have forgotten about. This way you can make an informed decision. Weigh the pros and cons of leaving the loans alone or consolidating.

If you want to work towards loan forgiveness, be careful. Including certain loans, such as the Parents PLUS loan, may make you ineligible. Always talk to your servicer before making a choice.

Consolidating Private Student Loans

Up until this point, we discussed federal student loans. Not everyone has only federal student loans, though. There are plenty of private student loans to go around. Private student loans are those not funded by the government. They may come from any bank that offers student loans.

Luckily, you aren't stuck with your private loans until you pay them off. You can consolidate private student loans too. However, it's not consolidating - it's refinancing. Let's look at the difference and what to expect.

Consolidating or refinancing private student loans works like any other refinance. You may combine several private student loans into one loan or you can refinance just one loan. Usually the goal is to lower the interest rate. In this case, though, you don't get a weighted average of your current loan rates. Instead, you apply for the current rates available.

Here's the tricky part. You don't automatically qualify. You must apply for private student loan refinance. Lenders look at things like:

  • Credit score
  • Income
  • Assets
  • Job history
  • Degree and school history

Tip: Not all majors are created equal. Remember that some degrees are weighted higher than others, what will you get your degree in? Read the Best College Majors for the Future.

Every lender has different requirements. For example, some lenders require credit scores in the 700s to qualify. Other lenders may allow credit scores in the mid-600s. The other factors will likely vary too.

Lenders look at the big picture. For instance, they may look for stable employment or income. They may also look at your education history. If your major qualifies you for a specific job, your future potential income may play a role.

The interest rate they offer varies based on the risk you pose to the lender. Riskier borrowers often have higher interest rates.

Combining Private and Federal Student Loans

All this refinancing and consolidating can get confusing. What if you have both private and federal student loans? Can you combine them? You could. The question is, should you?

Just as we discussed above, you should have a conversation with your loan servicer. Find out what benefits you may miss out on if you consolidate or refinance. However, you may lose eligibility for certain federal assistance if you aren't careful. For example, don't refinance your federal loans with your private student loans.

Does this mean it's wrong to refinance your federal loans into a private loan? It doesn't. It's a personal decision. Weigh the pros and cons. See if you are eligible for any type of loan forgiveness. If you are, it may be best to leave your federal student loans alone. You may be able to consolidate them to get a lower payment, but be careful.

The Bottom Line

Consolidating your student loans may be a great idea. It depends on your circumstances. Look closely at your loan types. Also look at what Loan Forgiveness Plans you may be eligible to receive. Take the necessary steps to obtain the help you need.

Before making any decisions, we recommend you talk to your servicer. You could also contact the U.S. Department of Education first or log on to the National Student Loan Data System (NSLDS) to view your loan information. This way you can make sure you exhausted all your options before you proceed.

More from CreditDonkey:

Student Loan Forgiveness

Infographics: Life after College

Life After College

How to Pay for College

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