What to Know About Student Loan Consolidation

Combining student loans into one debt payment could ease the strain on your bank account—just weigh the pros and cons first.

Written by Brian O'Connell / February 9, 2022
Reviewed by Mark Kantrowitz

Quick Bites

  • Typically, you consolidate either federal loans or private loans, but not the two types together.
  • Multiple private student loans can be combined into a single loan through a private refinance.
  • Some lenders will allow federal loans to be included in a private refinance, but then your federal loan benefits—such as lower interest rates—can be lost.
  • A federal consolidation loan’s interest rate is the weighted average of the interest rates on the original loans, rounded up to the nearest 1/8th of a percentage point.
  • The interest rate on a private refinance is a new interest rate based on the borrower’s (and cosigner’s) current credit scores.

U.S. student loan debt is seemingly on one trajectory—sky high. Over the past two years, as the global pandemic and resulting economic downturn has challenged borrowers, students have collectively assumed a record $1.58 trillion in student loan debt.[1] For a recent college student—or parent of one—it’s easy to think your portion of that bill will never go away.

In fact, 53% of student loan borrowers believe that they will be making student loan debt payments for the rest of their lives.[2] Given that federal student loans have a maximum repayment term of 30 years, thankfully that would technically be highly unlikely. There are also options for financially struggling student loan debt holders to buy some time, organize their loan debt and potentially reduce high interest rates, including consolidating federal student loan debt into one Direct Consolidation Loan, or refinancing private lender student loan debt.

“Student loan debt consolidation is the process of combining one or more student loans into a new loan,” says Ahren Tiller, founder at Bankruptcy Law Center in San Diego. “The purpose of consolidation is to make it easier to repay the loans by reducing the number of payments you have to make each month and/or refinancing your loans into a lower-interest-rate loan.”

So, are you ready to wrangle in your student loan debt? The guidance below could help you streamline your repayments.

Inside this article

  1. The pros
  2. The cons
  3. Strategies for consolidation
  4. How to get started

The pros of consolidating student loan debt

Consolidating student loan debt is a fairly common financial practice among borrowers. Approximately 11.3 million Americans have actively consolidated student loans, for a total of $555.1 billion.[3]

“There are many reasons you might want to consolidate your student loans, but most people do so because it makes it easier to manage their student loan repayment obligations by having one lender and one monthly bill to pay,” says Tiller.

Some of the most common situations where student loan debt consolidation could be useful include:

Managing highly variable payment amounts: For example, maybe you work part-time or have an income that varies each month. Having one lower student loan payment can make it easier for you to pay back your loan.

Having multiple student loans with different repayment terms: If you have unsubsidized undergraduate Stafford Loans and Grad PLUS Loans, you may want to streamline your student loan experience into just one loan with a single lender.

Being in danger of defaulting: You can avoid defaulting on a student loan by getting lower monthly payments.

The cons of consolidating your student loans

As beneficial as student loan consolidation can be, there are limits and even drawbacks to think about. The following items are at the top of the list of loan consolidation risk:

Public and private loans don’t mix

Typically, private and federal student loans can’t be merged into a single loan consolidation deal. Private student loans cannot be included in a federal consolidation loan.

However, private student loans can be refinanced into one single loan from a private lender. In some instances, private lenders may agree to adding federal loans to a college debt refinance, but interest rates are usually higher with private student loans.

Consolidating could cost you more in the long run

A loan consolidation deal may result in more interest paid over the life of the loan, depending on the repayment plan selected.

“Also, if a borrower has already started to make progress toward a loan forgiveness program, consolidation may eliminate that progress,” says Jessica Ferastoaru, student loan specialist at Take Charge America, a financial nonprofit in Phoenix. “So it’s important to be careful before deciding to consolidate your loans.”

The grace period could be lost

A grace period is offered on most federal loans before you have to begin making payments. Borrowers consolidating multiple student loans into a Direct Consolidation Loan may lose any remaining grace periods on their original student loans (though the U.S Department of Education generally allows borrowers to delay consolidation until the end of the grace period).

“Depending on when you took out these student loans and how much time is left in their respective grace periods, this could end up costing you more money or force you to start repayment earlier than expected,” says Tiller. “For example, if one of your previous loans has an 18-month grace period but it takes 24 months for your consolidation loan to repay all of the old ones, that could cost you more money.”

Tip: During the loan application process, consider calling on a trusted money manager or your lender to review all of your refinanced loan options and help select a repayment plan as part of the consolidation application.

3 strategies for loan consolidation

If you’re in the market for a consolidation loan or private refinance, be prepared and be diligent in your loan search. These tips can help keep your student loan consolidation or refinance experience on the right track.

1. Take the long view. When beginning the student loan consolidation process, list your priorities before contacting lenders.

“Ultimately, it’s important for borrowers to consider how consolidation will impact these three critical priorities: their monthly loan payment, the overall loan amount that they will be paying and any borrower benefits, such as loan forgiveness,” says Will Geiger, a former college admissions officer and co-founder of Scholarships360.org, a college financing services company.

The takeaway is to be as objective and data-driven as possible. “That way, you can create a simple spreadsheet and compare your current loan repayment plan with the new, consolidated loan plan,” Geiger says.

2. Don’t confuse student loan consolidation with refinancing. A common mistake around consolidation is that borrowers may confuse student loan consolidation with student loan refinance.

“With student loan consolidation, the rate on your consolidation loan will be a weighted average of the rates on your existing loans, whereas you may qualify for a lower interest rate with a refinance,” says Ferastoaru. “There are many benefits to federal consolidation, however, you want to be aware of the possibility that you may pay more interest by extending your loan term.”

3. Know your non-consolidation options. At first glance, it seems great to have one loan payment and a lower monthly payment. Yet, borrowers can wind up paying more money on their student loans after consolidation. For instance, an income-driven repayment plan is a non-consolidation option that adjusts your monthly student loan payment to better match your income and family size.

“Before you sign on the dotted line, weigh other college financing options, including switching to an income-driven repayment plan or private refinancing, both of which can also lower your monthly payment,” says Geiger. “That may save you more money in the long run.”

How to start the loan consolidation process

The student loan consolidation process is fairly straightforward. Borrowers can apply via the Office of Federal Student Aid. Here’s a peek into the lending office process:

“This is a free application and once students have completed [it], [the lender] will confirm receipt of the documents, ask the borrower to sign a promissory note, which certifies the borrower will repay all federal student loan debt, and agree to the new, consolidated loan and payment plan,” says Geiger.

It’s a good idea to review all of the possible college debt repayment plans to determine which one meets your unique financial needs. Compare each repayment plan based on the monthly loan payment and the total loan payments over the life of the loan.

Article Sources
  1. “Student Debt,” Federal Reserve Bank of New York’s Center for Microeconomic Data, https://www.newyorkfed.org/microeconomics/topics/student-debt.
  2. Andrew Pentis, “Most Student Loan Borrowers Think They’ll Have Debt Forever: Study,” Student Loan Hero, June 22, 2021, https://studentloanhero.com/featured/student-loan-debt-forever-survey.
  3. “Portfolio by Loan Type Excel Sheet,” National Student Loan Data System, 2021, https://studentaid.gov/sites/default/files/fsawg/datacenter/library/PortfoliobyLoanType.xls.

About the Authors

Brian O'Connell

Brian O'Connell

A former Wall Street bond trader, Brian O’Connell is the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”. His bylines include TheStreet.com, Forbes, The Wall Street Journal, U.S. News & World Report, Fox Business, and The Motley Fool, among others.

Full bio
Mark Kantrowitz

Mark Kantrowitz

Mark Kantrowitz is a nationally-recognized expert on student financial aid, the FAFSA, scholarships, 529 plans and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make smarter, more informed decisions.

Full bio

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