Should I Consolidate My Student Loans?

You may be wondering, "should I consolidate my student loans?"

Flickr user Ahmed ElHusseiny

Consolidating private and federal student loans involves combining multiple loans into one. The consolidation is generally done through a new lender and the resultant loan is considered as a completely new loan with a different interest rate and different payment policy. You may be wondering, “should I consolidate my student loans?”

Student loan consolidation is not the right decision for everyone, however. It does have a few downsides that may not make it the right choice for you. This is an individual decision that you should make only after taking time to understand the pros and cons.

Pros of Consolidating Student Loans

Convenience & simplicity: When you consolidate multiple loans into one, it is easier to stay organized with your student loan payments as you only have to keep track of one single deadline and you only have to make one payment a month.

Lower risk of incurring late fees or damaging your credit: In addition to incurring late fees, delayed or missed payments can also hurt your credit. With only one deadline and payment to deal with every month, there is a smaller chance that you will miss the deadline. Consider using an auto-debit method to help make your payments on time.

Potentially lower monthly payments: Depending on the terms and interest rates of your existing loans, the new lender may offer you a consolidated loan at a lower rate of interest or a longer repayment period, both of which will result in lower monthly payments. Your best chance of getting the lowest interest rate and best terms possible is if you have improved your credit score by making all of your earlier payments on time, every month.

Cons of Consolidating Student Loans

Loss of benefits associated with your earlier loans: This is especially relevant when you refinance and consolidate federal student loans with a private lender. Federal student loans offer several different repayment options. If you meet the requirements, you may also be eligible for loan forgiveness where all or a part of your loan may be forgiven. When you consolidate your loans, you lose all the benefits associated with the individual loans.

You could end up paying more over the life of the loan: When consolidating your loans, your new lender will offer you several options. If you are struggling to meet your current financial obligations, you can choose to extend the duration of the new loan, which will automatically result in lower monthly payments. While this will ease your financial stress, you should know that you will end up paying a lot more by way of interest over the life of your loan.

Not all lenders offer lower interest rates on consolidated loans: Lenders vary in the way they calculate interest rates and other terms on consolidated loans. Your loan amounts, credit score, and current interest rates are three of many factors that are considered when calculating the interest rate for your consolidated loan. Make sure your consolidated loan qualified for a lower rate before you decide to go ahead.

Most of the pros and cons mentioned above apply to both, federal and private student loans. However, you should know that it is inadvisable to consolidate federal and private student loans together. This is because federal student loans offer several unique benefits, which you will lose if you combine them with private student loans.

If you’re looking into refinancing or consolidating your student loans, be sure to check out our free guide!