Understanding Student Loan Consolidation

students examining loan documents

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Student loan consolidation is the act of combining multiple student loans into one loan. The process allows you to simplify your loan payments and receive other benefits, but it has its drawbacks and isn't the right move for everyone. Understanding the fundamentals and pros and cons of student loan consolidation can help you decide whether and how to proceed.

Basics of Student Loan Consolidation

When you consolidate your federal student loans, the lender repackages some or all or your existing loans into a Direct Consolidation Loan amounting to the balance of your old loans. The new loan comes with a fixed interest rate that is based on the weighted average of the interest rates on your old loans. You'll pay off your old debts with the loan proceeds and will continue to pay down the new loan through a single monthly payment under one of several repayment plans that take into account your income and family size.

Student loan consolidation is unique among debt consolidation programs because it offers certain perks:

  • You don’t have to qualify based on your credit score.
  • There is no maximum loan amount limit.
  • You can potentially defer repayment.
  • Debts are discharged upon the death of the borrower when consolidating PLUS loans.

Student Loans Eligible for Consolidation

You can't get a Direct Consolidation Loan if you have private educational loans. However, you can consolidate most types of federal student loans, including:

  • Subsidized Federal Stafford Loans
  • Unsubsidized and Nonsubsidized Federal Stafford Loans
  • PLUS loans from the Federal Family Education Loan (FFEL) Program
  • Supplemental Loans for Students
  • Federal Perkins Loans

While you can't consolidate private student loans, you can refinance them through a private lender. Refinancing can also result in a single monthly payment, but unlike loan consolidation, it allows you to combine federal and private loans.

Benefits of Student Loan Consolidation

The main reasons to consider consolidating are:

  • Lower monthly payments: Consolidating student loans may give you more time to repay your loan (up to 30 years), which can reduce the amount you pay each month if you're struggling to keep up with existing loan payments.
  • Fixed interest rate: Your interest rate will remain stable throughout the loan term, which avoids the fluctuating payments of variable-interest loans and makes it easier to budget for payments.
  • Single monthly payment: You'll only write one check each month to one loan servicer, as opposed to multiple checks to one or more lenders.
  • Flexible payments during hard times: Consolidating loans may qualify you for an income-driven repayment plan or loan forgiveness program. These payment features can reduce your payments when you face economic hardship or even cancel it after you make a certain number of payments, respectively. 

Depending on your financial circumstances, these advantages may or may not appeal to you. If you’re not worried about rising interest rates, your loans already come with fixed interest, or the interest rate is negligibly lower or perhaps even higher than the rates you're paying now, a fixed rate might not help you. Likewise, if you’re making your payments without any difficulty, you might have no need for lower payments.

Direct Consolidation Loans grant you a fixed—but not usually a lower—interest rate than the rate on your old loans. The interest rate is ultimately decided by the weighted average of the interest rates on your old loans.

Pitfalls of Student Loan Consolidation

The drawbacks of consolidating include:

  • Higher interest costs: Extending the repayment period to lower your monthly payments will end up costing you more interest over the long term, which can increase the total cost of the loan. However, you can opt for lower payments today and then make larger payments if your income increases.
  • Interest accrual on a higher balance: Any outstanding interest you have on current loans will get added to the balance of the Direct Consolidation Loans, which means that interest will potentially accumulate on a higher balance than it did before you consolidated.
  • Loss of certain loan perks: Consolidating student loans can cause you to lose discounts on interest rates or the principal balance, and may even make you ineligible for a loan forgiveness program attached to your current loans. If you have student loans with benefits like these, don't include those loans in your Direct Consolidation Loan.

Consolidating Student Loans With a Spouse

While married borrowers used to be able to merge their debts into a single joint consolidation loan, as of July 2006, you can only consolidate student loans under your name; you cannot consolidate loans with your spouse. 

However, your spouse's income may influence your eligibility for certain income-driven repayment plans and the associated monthly payment.

You can refinance student loans with your spouse through a private lender, but you'll generally need to add your spouse as a cosigner, which will make you legally responsible for repaying the debt if your spouse defaults on it.

When to Consolidate Student Loans

You can get a Direct Consolidation Loan after you graduate, leave school, or drop down to half-time enrollment. However, the loans you want to consolidate must be either in repayment or within the grace period.

The best timing for student loan consolidation depends on a variety of factors:

  • Income security: Repayment of the loan generally starts 60 days after you receive the loan proceeds. If you can't secure enough income after graduation to start repaying the loan, you might want to delay consolidation.
  • Interest rates: If interest rates are low now, you may want to consolidate your student loans now to lock in a low fixed rate. If you anticipating rates falling, you can may want to delay the consolidation.
  • Budget: If you have other large expenses after you leave school, you may want to secure a loan with an extended repayment plan that results in lower monthly payments.

Moving Forward With Consolidation

You’ll likely get a pile of mail as you near graduation from loan servicers tempting you to combine your student loans.

If you have federal loans, it's often wise to consolidate with a Direct Consolidation Loan through the U.S. government, as federal loans are generally more borrower-friendly than private student loans. To apply at no cost, fill out the Direct Consolidation Loan application through the U.S. Department of Education website. During this process, you will select the loans that you do and don't want to include in the consolidation. The loan servicer will then consolidate the eligible loans and notify you of your first payment due date.

If you decide to work with a private lender, it's worth asking your financial aid office for recommendations. They may have heard some recent success stories (and horror stories). The application process is similar to that of consolidation, but you can consolidate both federal and private loans.