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When Should I Consolidate My Student Loans?

Oct 30, 2015 | By Chris Couch

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If you have multiple loans (and multiple monthly payments that go with them), there is a way to combine all of those payments into one single monthly payment and potentially save a bit on interest in the process.

Figuring out if and when you should consolidate your student loans can be tough, but is an essential part of learning how to pay for college. On federal loans, you are generally able to consolidate shortly after you graduate, leave school or drop from full to part-time. Private loans each come with their own regulations on how early you can consolidate; however, many follow the same guidelines as federal loans.

How Consolidation Works

During loan consolidation, borrowers take out a brand new loan and use it to pay off the boatload of separate, smaller loans they're already holding. The new consolidation loan comes with its own interest rate, fees, repayment terms, benefits and hardship protections and wipes out the terms and conditions of your old loans. Consolidation loans may offer lower interest rates, can be an easy way to switch from a variable interest rate to a fixed one if you desire, and can be a simple way to drop a cosigner who'd rather not be on your loan, but there are drawbacks. These loans also come with longer repayment periods, which means you'll pay more interest over the long haul, and you could lose valuable borrower protections you have on your existing loans.

Types of Loan Consolidation

There are two basic types of consolidation programs. The government's Direct Consolidation program available at Loanconsolidation.ed.gov allows borrowers to consolidate most major federal loans including Stafford, Direct and PLUS Loans, but not private loans. The interest rate on the new loan is determined according to the weighted average of the interest rates on your old loans. A major bonus of consolidating through the federal government is that federal consolidation loans come with impressive borrower protections like extended and income-based repayment options, deferment and forbearance programs and loan-forgiveness options.

If you have private as well as federal loans, private lenders also offer their own consolidation products, but grads who go that route may lose some or all of the borrower protections that come with federal loans. Unlike the federal government, private lenders frequently base the rates of their consolidation loans on the borrower's credit, which can mean less favorable rates for those who don't have stellar credit.

Should I Consolidate?

Deciding if you should consolidate is a whole different task. You'll first need to evaluate whether your current loans are manageable and if you really want the longer repayment period and extra interest costs that come with consolidation loans. For loans that you've nearly paid off or ones that come with shorter repayment periods, consolidation may not be the best bet. Borrowers who stick it out with repayment terms they already have oftentimes save big over the lifespans of their loans, but if you do choose to consolidate, it's typically easier to do so before you go into default or get into financial trouble. The next step is to compare the interest rates, repayment terms and borrower protections on your current loans to those offered on consolidation products. While many consolidation loans can reduce your interest rate, some may actually jack it up. Once your loans have been consolidated, there's no going back, so shop carefully.


Sources:

1. Borrower Services, Eligible Loans, http://loanconsolidation.ed.gov/borrower/bloans.html
2. Federal Direct Consolidation Loans: Information Center, U.S. Department of Education, Direct Consolidation Loans, http://loanconsolidation.ed.gov/borrower/bloans.html
3. Federal Student Aid, Repay Your Loans, https://studentaid.ed.gov/repay-loans
4. FinAid, Private Student Loan Consolidation, http://www.finaid.org/loans/privateconsolidation.phtml
5. Loan Consolidation, U.S. Department of Education, Federal Student Aid, https://studentaid.ed.gov/repay-loans/consolidation
6. Repay Your Loans, U.S. Department of Education, Federal Student Aid, https://studentaid.ed.gov/repay-loans
7. Wells Fargo, Wells Fargo Private Consolidation Loan, https://www.wellsfargo.com/student/private-loan-consolidation/