How Student Loan Consolidation Works

arek_malang /

Approximately 44 million Americans are crushed under the weight of $1.3 billion in student loan debt, according to The New York Times. Although there’s no magical way to make student loans disappear, there are some options that could lighten your load.

Student loan consolidation is one option that might improve your overall financial health. By consolidating multiple loans from various lenders into one loan with a single lender, you could avoid late payments and other expensive budget mistakes.

Consolidation vs. Refinancing: Here’s the Difference

People often confuse student loan consolidation with student loan refinancing. Consolidating loans is similar to refinancing but there are some differences.

When you have several federal student loans you can combine — or consolidate — them into a single loan. The new lender pays off your existing student loans and you make one monthly payment to the new loan servicer.

You won’t necessarily save money by consolidating your loans, however, as the weighted average of your existing loans will determine your interest rate.

Student Loan Refinancing

Refinancing involves paying off your existing loans in exchange for a new loan with a lower interest rate. This can likely save you money in the long run because you won’t be paying as much in interest. If you do refinance your loans, however, you might end up with a longer loan term, which could mean paying more interest over time. Make sure you find out how much you’d be paying over the life of the loan before you make a decision.

Read: 5 Things to Know Before Refinancing Your Federal Student Loans

Save for Your Future

Student Loan Consolidation

The federal government might be the source of some or all of your loans. If you’re interested in consolidating federal student aid loans only, consider government Direct Consolidation Loans, which combine multiple federal education loans into one loan. You also have the option to consolidate your student loans through a private lender, but it’s important to know that the interest rates will be dictated by the lender, not the government.

“Before you make the final decision, it’s very important to consider whether you’ll lose any important benefits by consolidating your student loans, particularly if you’re thinking about consolidating federal loans with a private lender,” said Joseph DePaulo, CEO of College Ave Student Loans, a company that offers private student loans.

Related: 10 Best Private Student Loans

Determining if Consolidation is Best

Deciding whether to consolidate your student loans can be a tough decision. Consider the pros and cons before you sign on the dotted line.

Student Loan Consolidation Pros

  • You pay one monthly bill only.
  • You might be able to lower your monthly payments by extending the loan term up to 30 years.
  • Alternative repayment plans might be available.
  • You can switch from a variable interest rate to a fixed interest rate.

Student Loan Consolidation Cons

  • If you stretch your repayment period up to 30 years, you’ll make more payments and pay more in interest.
  • You might lose some borrower benefits from your original federal government loans, including various repayment plans, interest rate discounts, principal rebates and loan cancellation benefits.
  • You can’t “un-consolidate” student loans.
Save for Your Future

“Federal loans carry special benefits — like public service forgiveness and income-driven repayment options — that are not typically available on private loans,” said DePaulo. “Make sure you know what those benefits are — and if you are likely to lose them — before you commit.”

Federal vs. Private Education Loans

“You can’t use a federal loan consolidation to combine your federal and private loans,” said Justin Chidester, an AFC and fee-only financial planner who owns Wealth Mode Financial Planning in Logan, Utah. “The only way to do that is to refinance all your loans — both federal and private — with a private lender, which isn’t recommended in most cases.”

Chidester outlined a number of circumstances under which it might make sense to consolidate debt. “If you have really good credit and are confident you’ll have enough steady income to pay your loans in the long run, then a private refinance at a lower interest rate could be a good idea,” said Chidester. The assumption that you’ll always have top-notch credit and remain employed in the long term is a gamble, however, so consider this move carefully.

Don’t Miss: 15 Steps to Paying Off Your Student Loans

Consider Your Options

If you have a lot of student loan debt, you might wonder, “Should I consolidate my student loans?” As a borrower, you can’t make a decision about whether to consolidate or refinance student loans without having a full understanding of how each options works, as well as the advantages and disadvantages.

“Know what’s important to you and this will help you shop for a loan that best fits your needs,” said DePaulo. DePaulo suggests you get organized for the search and use this checklist before you sign up for a student loan refinance or consolidation loan:

  • Gather all the information regarding your existing student loans.
  • Determine which are federal and which are private education loans.
  • Jot down the current interest rate of each loan and whether the rate is fixed or variable.
  • Include your current monthly payment on each loan.
  • List the anticipated payoff date for each loan.
Save for Your Future

You might have attended college for only four years but it will likely take you much longer to pay off your student loans. Make sure you’re armed with all pertinent information before you make a major financial move to refinance or consolidate.

Up Next: Ditch Your Student Loans by Leaving the Country


See Today's Best
Banking Offers