Debt Consolidation

Should I Consolidate Student Loan Debt?

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Was your college education worth the cost? In our recent survey about student loans, 39% of people said that it wasn’t. While a college education may open the path to better job outlooks and higher pay, it’s frustrating to be shackled with student loan debt that could take up to 25 years to pay off.

If you’re in over your head with student loan debt, you may be looking for any solution that lessens your financial burden. For some, student loan consolidation does offer that. But student loan consolidation isn’t always the answer. Read on to find out if this could be the right choice for you.

How to Consolidate Student Loans

Student loan consolidation is when you group multiple student loans into a single loan. This process could help you simplify your payment schedule and could even save you money on interest, based on the type of loan you take out.

Both federal student loans and private student loans could qualify for student loan consolidation, but your consolidation options will depend on who you borrowed the money from.

Consolidate Federal Loans

If you only have federal loans, you could consolidate them all into a Direct Consolidation Loan, which could allow you to keep many of your federal student loan benefits, such as deferment or the option to enroll in Income-Driven Repayment Plans. But since your new interest rate will be a weighted average of your current interest rates, these loans may not save you much money on interest in the long run.

Consolidate Private Loans

On the other hand, if you only have private student loans or a mixture of private and federal student loans, you may be able to consolidate your student loans through a private lender. You’ll lose the benefits of your federal student loans, but you could end up with a lower interest rate.

In addition to student loan consolidation, many private lenders also offer student loan refinancing. Refinancing involves taking on a new loan to pay off your current student loans.

Pros of Student Loan Consolidation

Depending on your situation and goals, consolidating your student loans might help you reach your financial goals sooner. Here are a few potential benefits of student loan consolidation:

1. Private Loans Could Lower Your Rates

While a Direct Consolidation Loan will not lower your rates, consolidating your student loan debt with a private lender could get you a lower interest rate than the one you’re paying right now.

2. More Time to Pay Back the Student Loans

When you consolidate federal student loans with a Direct Consolidation Loan, you’ll be able to choose between repayment plans that range from 10-25 years. Depending on which option you choose, you might have more time to pay back your debt than you would under your current repayment plan.

If you opt for private student loan consolidation, you will also have a choice in how long you get to repay the loan. This number varies from lender to lender.

3. Could Lower Your Monthly Payments

If you choose a longer repayment period, you’ll likely end up with lower minimum monthly payments than what you currently pay. While this means that you will pay more in interest over time, lower payments could help if you’re struggling to keep your head above water.

4. Minimal Credit Score Impact

Because a Direct Consolidation Loan doesn’t require a credit check, your credit score won’t be negatively impacted by consolidating your federal student debt. Most private lenders require a soft credit check, which impacts your score far less than a hard credit check. Keep in mind that if you fail to make payments on time every month, your credit could be negatively impacted.

Cons of Student Loan Consolidation

While student loan consolidation could be the right choice for many, it might not be the right choice for you. Here are the potential downsides of student loan consolidation:

1. Could Cost You More Each Month

If your new repayment plan is shorter, you’ll likely end up with higher monthly payments than you’re currently paying on your student loans.

2. You May Lose Certain Privileges

If you’re currently working toward Public Service Loan Forgiveness (PSLF) or another type of student loan forgiveness program, consolidating your federal loans will reset the clock, meaning any progress you’ve made toward getting your loans forgiven through public or non-profit work will be erased. If you consolidate federal loans with a private lender, you will lose federal privileges such as deferment and forbearance.

3. Could Cost You More in Interest Over Time

You might have lower monthly minimum payments when you consolidate your student loans, but since you typically extend the repayment period when you consolidate your student loan debt, it’ll cost more in interest over time.

4. Could Increase Your Interest Rate

When you consolidate with a Direct Consolidation Loan, your new interest rate will be calculated by averaging the interest rate on all your current loans and adding one-eighth of 1%. That means that if you have several large loans with high-interest rates, your new weighted average will be higher than your current rate.

5. You Can Only Consolidate Your Federal Student Loans Once

If you want to take out a Direct Consolidation Loan, you can only do it once. So, if market interest rates fall in the future, you’ll be stuck with at the rate you have and won’t be able to refinance again to take advantage of them.

Is It a Good Idea to Consolidate Your Student Loan Debt?

If you’re having trouble keeping up with minimum monthly payments, consolidating might help. By extending the total life of your loan, you will lower your monthly payments and relieve some immediate pressure. However, keep in mind that extending the total life of your loan also means that you’ll end up costing you more in interest.

If you’re considering consolidating federal loans into a private loan, be aware that you could lose many of the benefits that could help you if you’re struggling with your debt, such as deferment and forbearance.

It’s also important to keep in mind that consolidated student loans will not qualify for PSLF or other loan-forgiveness programs. So if you’ve already been progressing toward having your loans ultimately forgiven, consolidation may not be right for you.

Here’s a good rule to follow when considering student loan consolidation: if it’s going to net you lower interest rates or lower monthly payments, it might be worth considering. However, if consolidation leaves you with higher interest rates AND higher payments, it’s not going to help you get out of debt.

Should You Use Home Equity to Pay Off Student Loan Debt?

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If you’re dealing with credit card debt on top of your student loans, it might be more effective to deal with your credit card debt first. Since credit card debt typically carries a higher interest rate than student loans, paying them off could alleviate some of your stress and free up the extra cash you need to get out of student loan debt faster. To learn about six different ways to tackle your credit card debts, download our free debt management guide now.

Housten Donham is a freelance copywriter. He hopes to help others navigate their financial futures and cultivate a healthy relationship with money. He lives in Arizona, where he spends most of his free time reading and writing.