Understanding Student Loan Consolidation

Student loan consolidation is the act of putting a loan or various loans into a new package. You get some special benefits, and you can structure the loan the way you want.

Student Loan Consolidation

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The main reasons to consider student loan consolidation are:

  • Potential for lower monthly payments
  • Fixed interest rate
  • Only write one check for various loans
  • Potentially flexible payments during hard times

Depending on your circumstances, these may or may not be that interesting to you. If you’re not worried about rising interest rates, for example, then you might not care about getting a fixed rate. Likewise, if you’re making your payments without any difficulty, you might have no need for lower payments.

How Student Loan Consolidation Is Unique

There are a lot of debt consolidation programs out there. Student loan consolidation programs are unique because they offer certain benefits that only come with student loans. A few of the biggies are:

  • You don’t have to qualify based on your credit score
  • There is no maximum amount available
  • You can potentially postpone repayment
  • Debts are discharged at the death of all borrowers
  • Interest paid on student loans may be tax-deductible

In general, consolidation is most beneficial when you consolidate federal student loans under as part of a government-sponsored consolidation program.

If you have private student loans, you can still "consolidate," but you're really just refinancing those loans.

Pitfalls of Consolidation

Do some extra homework if you have Perkins loans, or if you’re still in school. It can be more complicated, and you don’t want to unknowingly give up any benefits.

Keep in mind that lowering your monthly payments (by extending the repayment period) will end up costing you more interest over the long term. However, you can pick the lower payment today if you want, and then make larger-than-required payments if your income increases.

Consolidating Loans From One Source

You don’t have to, but you might want to. The lender simply repackages your loans so they have the characteristics mentioned above (fixed-rate, etc.). If you’ve only used one lending source, you may have limited options on who to consolidate with. If you’re still in school now, consider getting loans from other lenders so that you have more choice when you graduate.

Remember that loans from the U.S. government are always more borrower-friendly than private student loans. Think carefully before mixing the two types (for example, you'd need a good reason to consolidate federal student loans with a private lender).

Interest Rate

Check your statements. Some will show the rate on a given loan. If you can’t find it, call your lender and ask. You might have several loans—one for each enrollment period, so be sure to get them all.

Can I Consolidate With My Spouse?

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You cannot consolidate student loans with your spouse, but joint consolidation was possible before 2006.

There are (or would be) several drawbacks to a joint consolidation. If you want to go into deferment (when you temporarily stop making payments, perhaps due to unemployment), both spouses must qualify for deferment. 

What's more, if you combine loans and one of you should die, the surviving spouse will be required to pay off the deceased’s loan. In addition, you will have an unpleasant time if you get divorced and have your loans held jointly.

Finally, there's also the matter of loan forgiveness. Especially if one of you works in public service, you might give up the opportunity to have those loans wiped out in the future.

Logistics of Consolidating

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You can consolidate your student loans during your grace period or during repayment. You might even get to do a consolidation before you graduate. The timing depends on a variety of factors:

  • Consolidating during the grace period may get you a lower rate
  • You don’t want to consolidate too soon after graduation. If you do, you might lose out on some interest subsidies
  • If you think interest rates are low, you might lock in the rate
  • If you want a lower monthly payment today, you might try to get an extended repayment plan

Who to Consolidate With

You’ll likely get a pile of mail as you near graduation. Who should you trust?

If your loans are from government programs, it's often wise to consolidate under the federal Direct Loan program. Again, these loans have the most consumer-friendly features. For complete details, check with the U.S. Department of Education.

It's also worth asking your financial aid office for recommendations. They may have heard some recent success stories (and horror stories).

If you decide to work with a private lender, be careful about combining federal and private loans. The purest form of consolidation is only available for federal loans, but it is possible to combine private loans.