Student Loan Consolidation: A Real Look at the Benefits of Consolidating Student Loans and the Negatives

Student loan consolidation can be a smart route to go to simplify your student loan debt, but there are drawbacks as well as benefits.

Student Loan Consolidation: A Real Look at the Benefits of Consolidating Student Loans and the Negatives

Loan consolidation has many benefits. But before you sign on the dotted line, you should always read up on the pros and cons. When it comes to student loan consolidation, it’s the same deal. There are plenty of benefits of consolidating student loans, but if your situation doesn’t actually call for loan consolidation, you may inadvertently put yourself in a worse position. Let’s take a deeper dive into consolidating student loans and fleshing out all the pros and cons.

An Introduction to Student Loan Consolidation

Chances are, you don't even want to think about your student loans yet. You've got at least six months before your grace period ends, and you want to enjoy them. Take a few minutes now to ponder loan consolidation, however, and you might ease the pain of repayment. However, it is essential to first clear up some confusion about consolidating student loans.

Who Qualifies for Student Loan Consolidation?

Student borrowers that are currently in their grace period or in active repayment who owe money on eligible student loans (for example, Stafford loans). Those enrolled in school at least part-time can consolidate if they have a Direct Loan Program Loan or attend a Direct Loan school. Depending on whether you’re consolidating student loans from private lenders or federal student loans, financial history like credit scores could come into play in determining your eligibility.

Private Student Loan Consolidation vs. Federal Student Loan Consolidation

When it comes to student loan consolidation, there are actually two types of it. One is private student loan consolidation, often called student loan refinancing; this is a process for student loans gotten through private lenders. Student loan refinancing, which again, can also be called private student loan consolidation, is a financial option you can pursue by going through a private lender. If you're eligible, you may be able to save money by getting a reduced interest rate.

The second type is federal student loan consolidation. This type of loan consolidation combines several federal loans into one federal loan via the Department of Education. You may need to consolidate your student loans in order to qualify for certain federal loan repayment programs. However, it is key to note that federal consolidation doesn’t typically reduce your interest rate. Instead, it may reduce your student loan payments by extending them.

Pros and Cons of Private Student Loan Consolidation

Consolidating private student loans, or student loan refinancing, entails replacing several student loans — which could be private, federal or a combo of the two — with one new and private loan. The way you typically save money here by this method of student loan consolidation is if your new loan has a lower interest rate than the original(s).

For private student loan consolidation, your financial history comes into play in a big way. Thus, for example, your credit score, your income, employment history, and educational background, will have a large impact on your new interest rate when you refinance student loans. There’s no official credit score minimum required for private student loan consolidation, but having a credit score of at least in the upper 600s is fairly standard in order to qualify.

One of the main cons of private student loan consolidation is that refinancing federal student loans into a private consolidation loan means losing consumer protections specific to federal loans. Those include the option to tie payments to income and opportunities for loan forgiveness.

Like the federal government, private companies offer the option to consolidate multiple student loans into one. But while you can't transfer private loans to the federal government, you can consolidate both federal and private loans with a private lender. The goal with this process is not only to get the ease of a single payment, but to receive a lower interest rate based on your financial history.

Bear in mind though: Under contemporary law, once you refinance your federal loans into a private loan, you can’t convert your loans back into federal student loans or get any of the benefits of the federal student loan program. So, you really have to do your homework on private student loan consolidation and weigh the pros and cons.

Pros and Cons of Federal Student Loan Consolidation

One of the first pros of student loan consolidation for federal loans is that it doesn’t have a credit requirement. This can be an immeasurable benefit for those wondering, “should I consolidate my student loans?”— and an insurmountable block for those pursuing private student loan consolidation. As is common with other forms of loan consolidation, federal student loan consolidation offers the benefit of having a single loan bill and possibly lower payments

However, one of the principal cons of student loan consolidation when they are federal student loans is that it won’t cut your interest rate. Typically, the reduced student loan payments come from extending the terms of the loan — they don’t come from a reduction in the loan interest rate.

The way the interest rate works when you federally consolidate student loans is that your new fixed interest rate will be the weighted average of your previous rates, rounded up to the next eighth of a percent. For example, if your average weighted interest rate from previous student loans equals 5.4%, your new interest rate will be 5.5%, since 0.5% is fourth-eighths and three-eighths is 0.375%.

When you consolidate federal loans, the government pays them off and replaces them with a direct consolidation loan. You’re typically eligible for federal student loan consolidation once you graduate, leave school, or drop below half-time enrollment and therefore aren’t a full-time student. Consolidating your federal loans through the Department of Education is free, so watch out for companies that charge fees to consolidate them for you.

Utilizing federal direct consolidation loan applications are strong financial management tools that can assist you in managing the repayment of your federally guaranteed student loans. The Direct Consolidation Loan Programs enable you to combine all of your eligible Federal education loans into one new loan, generally resulting in a significantly lower monthly payment due to the flexible repayment and extended repayment term features.

Why Would I Want to Consolidate Student Loans?

There are many good reasons for consolidating student loans. Some examples of the reasons to consolidate student loans include: 

  • The potential of lower monthly payments. 

  • One monthly loan payment (instead of several). 

  • A lower, fixed interest rate

  • An easy application process that does not include a credit check or any application, origin or processing fees, but this is for federal student consolidation only. 

  • Flexible payment plans and terms that allow you to design a repayment plan that best suits your financial needs both now and into the future as your financial circumstances change. 

  • The option to prepay your loan at any time without incurring a penalty.

Getting more specific, you should consider private student loan consolidation if some of the below apply to you:

  • You have existing private student loans

  • You have good or excellent credit, typically defined as credit scores of 690 or better

  • You have access to a co-signer with good credit and financial history if you do not

  • You have secure employment and income

Now turning to federal student loans, you should consider federal student loan consolidation if some of the below apply to you:

  • You need to consolidate loans in order to qualify for income-driven repayment or public service loan forgiveness. 

  • If you want a single federal loan payment, but don’t need the payments to be significantly lower

  • You are in student loan default and want to get back on track

Thus, there are plenty of good reasons to consolidate student loans and tons of borrowers likely fit some of the above mentioned criteria.

Why Wouldn't I Want to Consolidate Student Loans?

Of course, student loan consolidation has a downside. Take note of interest rates. If you consolidate high-interest loans with low-interest loans, you may be paying a higher rate on average. So do your math; If the majority of your loans are high interest, you may want to pay that low-interest loan off separately.

Beware of payment flexibility. It's great to have the option to make low monthly payments over a longer span of time. Just keep in mind that the total amount you pay on a loan will end up being higher because of all that interest piling up.

Another reason to potentially be wary concerns the matter of fixed versus variable interest rates. Look closely if you are switching from a fixed rate loan to a variable rate loan. Interest rates for most federal loans have fixed rates, which means that you never have to worry about your interest rate and monthly payment going up if interest rates rise in the future. If you switch to a private variable rate loan, your interest rate could rise above the original fixed rate, and your payment could go up.

Another reason you may not want to consolidate federal student loans into a single private loan is because you will no longer qualify for certain repayment programs or plans. Federal student loans provide options for borrowers who run into trouble, including income-driven repayment  (IDR). If you consolidate with a private lender, you will lose your rights under the federal student loan program, including deferment, forbearance, affordable repayment options, and even the possibility of loan cancellation .

You may likely also lose certain benefits if you refinance. Borrowers working in public service or as teachers in certain low-income schools may be able to get loan forgiveness for certain federal loans. If you refinance your federal loan with a new private student loan, you will no longer be able to qualify for participating in these federal loan forgiveness programs. Another and often overlooked downside is that you may also lose the protection of loan discharge or forgiveness in the case of death or permanent disability, which you get with federal student loans. Not all private student loan providers offer loan discharge benefits or forgiveness in the case of death or permanent disability.

The Bottom Line on Is Consolidating Student Loans a Good Idea

You should consolidate your federal loans if you want to make a single monthly payment or need to consolidate to qualify for programs like Public Service Loan Forgiveness. If you want to save money by lowering your interest rate, consider private loan consolidation — again, also known as student loan refinancing. You can consolidate federal student loans with the Department of Education or a private lender, which is also called refinancing. If you refinance federal loans with a private lender, you'll lose access to government programs, like income-driven repayment and Public Service Loan Forgiveness. The main thing to remember is that, too often, loan consolidation programs are advertised as a cure-all for any and all forms of outstanding debt; that’s simply not true. You really must read the fine print, assess your own situation, and decide if consolidating student loans — whether federal or private student loans — makes sense for you.

Andrew DePietro

Author: Andrew DePietro

Senior Researcher, and Content Strategist

Andrew DePietro is a finance writer covering topics such as entrepreneurship, investing, real estate and college for BrokeScholar, Forbes, CreditKarma, and more.