Student Loan Consolidation: All You Need to Know

You’re finally graduating from college, ready to start your career and adult life. But along with the diploma comes a harsh reality – student loan debt, and lots of it.

The average college graduate in 2023 has around $30,000 in student loans. That’s certainly not pocket change, and paying back those loans can feel like a huge burden hanging over your head.

You’ve probably heard about student loan consolidation and wonder if it’s right for you.

Student loan consolidation allows you to combine multiple federal student loans into one new loan with one monthly payment instead of many.

This simplifies the repayment process and lowers your monthly payments. But is consolidation all it’s cracked up to be?

Here’s a detailed look at the pros and cons of student loan consolidation and key factors to consider when deciding if consolidation is the right move for your situation.

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The Potential Benefits of Student Loan Consolidation

1. Lower Monthly Payments

The primary benefit of consolidation is the possibility of a lower monthly payment.

When you consolidate, your consolidated interest rate will be a weighted average of all your loans’ interest rates rounded to the nearest one-eighth of a percent.

Sometimes, this new consolidated rate may be lower than your previous rates, lowering your monthly payment.

Consolidation also allows you to stretch your repayment term from 10 to 30 years. A longer-term means a lower minimum payment each month.

Remember that you’ll pay more interest over time if you extend your repayment term.

2. One Simple Payment

Instead of keeping track of multiple student loan payments each month, consolidation lets you combine everything into one simple payment.

This can make organization and budgeting much easier each month with less risk of missing or late payments on one of your loans.

3. Access to Income-Driven Repayment Plans

Federal student loan consolidation loans qualify for income-driven repayment (IDR) plans, which base your monthly payment on your income and family size.

IDR plans like Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR) cap your payments at 10-20% of your discretionary income.

If your income is low enough, your payment could be as low as $0/month. IDR plans can provide payment relief and lead to loan forgiveness after 20-25 years of payments.

You can only access IDR plans if you have federal Direct Loans, which is what a Direct Consolidation Loan becomes.

4. Deferment and Forbearance Options

If you struggle to make payments and need temporary relief, federal consolidation loans allow access to deferment and forbearance programs.

Interest may still accrue in these programs, but they sometimes halt payments.

5. May Help With Public Service Loan Forgiveness (PSLF)

The PSLF program provides federal student loan forgiveness after ten years of payments while working full-time for an eligible public service employer. To qualify, you must have federal Direct Loans.

Consolidating FFEL Loans into a Direct Consolidation Loan can help align your loans with PSLF requirements.

Key Drawbacks of Student Loan Consolidation to Consider

Here are some downsides to student loan consolidation;

1. No Lowering of Interest Rate

Consolidation only lowers your interest rate if you consolidate variable-rate loans into a fixed rate.

Consolidating federal loans usually increases your rate slightly due to rounding up to the nearest 1/8th percent. You can only lower rates substantially by refinancing with a private lender.

2. Loss of Loan Benefits

When you consolidate, any specific benefits from your previous federal loans disappear.

For example, if you had subsidized Stafford Loans, the government previously covered interest during school and the 6-month grace period. That benefit goes away after consolidation.

3. No Change in the Total Amount Owed

Consolidation does not reduce your overall loan principal or the total interest you pay over the loan’s life.

You still owe the same amount; it is just combined into one loan with potentially a lower monthly minimum payment and longer repayment term.

4. Possible Higher Total Repayment Costs

As mentioned above, student loan consolidation causes you to lose any interest subsidies and usually increases your interest rate slightly.

Stretching out repayment for longer through consolidation means you pay more interest over time than you would on the standard 10-year plan.

5. Negative Impact on Credit Score

Consolidating your student loans counts as paying off the old ones and opening a new loan on your credit report.

As a result, consolidation causes your credit mix to show fewer types of accounts, which can result in a short-term drop in your credit score. This impact is usually minor and temporary.

Read Also: Where Can a Student Get a Loan?

6 Key Factors to Consider Before Consolidating Your Student Loans

Deciding if consolidation is right depends on your unique student loan situation and financial goals.

Keep the following key factors in mind as you determine whether consolidation will benefit or harm your situation:

1. Your Current Interest Rates

Consolidation increases rates slightly, so it may not be worth it if your existing federal rates are low.

However, consolidation may help lower the weighted average interest rate if you have some high-rate loans.

2. Your Loan Types

Consolidation combines federal loans into a Direct Loan but cannot consolidate private loans. It can help simplify repayment if you have multiple federal loan types but won’t address private loans.

3. Your Repayment Goals

If your goal is lowering monthly payments at all costs, then consolidation for term extension can help. However, lowering monthly payments means paying more interest over time.

4. Your Eligibility for PSLF

Direct Loans are required for PSLF eligibility, so consolidation opens the door to loan forgiveness if you plan on public service work.

5. Your Financial Situation

If you struggle to make multiple monthly loan payments, consolidation offers simplicity. However, it limits deferment/forbearance eligibility on the new loan.

6. Future Payment Flexibility

Once consolidated, you can no longer separate or target loans with extra payments. Consolidation locks everything together into one loan.

Analyze your student loans and consider your repayment goals carefully before deciding if consolidation will help or hurt your situation.

Consolidation offers potential benefits like lower payments but also drawbacks you need to weigh.

Next Steps: Applying for Student Loan Consolidation

If you’ve done a thorough assessment and decided student loan consolidation aligns with your goals, here are the steps to apply:

  1. Choose your federal consolidation lender – You can consolidate via the Department of Education’s Direct Loan Program at or through private lenders like SoFi, Earnest, LendKey, and Laurel Road.
  2. Complete loan counseling – Required counseling provides details and information on consolidation loans.
  3. Submit consolidation application – You’ll need personal info, tax details, employer info, loan paperwork, and references.
  4. Select repayment plan – Opt for standard, graduated, extended, income-driven, or income-sensitive plans.
  5. Review loan details – Double-check your new loan interest rate, terms, lender servicer, and monthly payment amount before signing.
  6. Finalize consolidation – Sign your promissory note to complete the federal direct consolidation loan process.

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Final Thought

Don’t rush into consolidation without considering all factors carefully. Consolidation can simplify repayment but also has permanent effects you must fully understand.

Analyze your goals, loan details, and financial situation before moving forward to ensure student loan consolidation helps more than harms your situation.

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