If you carry more than a single student loan, consolidation would seem like an ideal way of simplifying your repayment process. Instead of keeping track of a series of loans with different interest rates and maturity dates, you can consolidate them into a loan with one single monthly payment. Although consolidation possesses many benefits, it also carries potential drawbacks. Understanding the advantages and disadvantages will help you know whether it is the ideal way for you.
What is student loan consolidation?
Student loan consolidation is the process of combining multiple federal student loans into a single loan through the federal government. Your new loan will have a fixed interest rate, which is the weighted average of your previous loans’ rates. This can make repayment easier, but it does not always save you money.
Private lenders also offer loan consolidation, but this is known as refinancing. Private refinancing may provide lower interest rates but removes access to federal loan benefits.
Read more: What is the monthly payment on a $120,000 Student Loan?
What are the benefits of consolidating student loans?
Consolidating your student loans has several advantages, especially if you have multiple loan servicers. Some of the most significant benefits are:
- Simpler to repay – Instead of juggling multiple different loan payments, you’ll have one monthly payment to concern yourself with.
- Fixed interest rate – If you have variable-rate loans, consolidating them will lock your rate in place, so you can more easily budget your payments.
- Smaller monthly bills – A consolidation loan can lengthen the payoff term up to 30 years, reducing the size of each month’s bill.
- Greater payment plan options – Combining non-Direct federal loans can enable you to be eligible for other income-driven payment (IDR) plans.
- Potential Public Service Loan Forgiveness (PSLF) eligibility – Some loans are not individually eligible for PSLF but will qualify after consolidation.
What are the downsides of consolidating student loans?
While consolidation can make managing your loans easier, it is not always the best option. Here are some drawbacks to consider:
- More interest over time – Extending your repayment period means you will likely pay more in total interest.
- Loss of certain borrower benefits – Some federal loans offer interest rate discounts or principal rebates that you may lose after consolidation.
- Resets progress toward loan forgiveness – If you have already made qualifying payments toward PSLF or an IDR plan, consolidating your loans will reset that progress.
- No guarantee of a lower interest rate – Your new interest rate will be a weighted average of your existing loans, so consolidation may not reduce your costs.
Read more: Will I still get student loans or are they affected by Trump’s federal funding freeze?
Is student loan consolidation right for you?
Consolidating your student loans is a financial decision that will depend on your goals. Consolidation might assist you if:
- You want to simplify making your payments.
- You need to have more repayment plan choices available.
- You are not already close to qualifying for loan forgiveness.
- You prefer a fixed interest rate over a variable one.
But if you’re close to paying off your loans or attempting to qualify for PSLF, consolidation may not be the best idea.
Additionally, before you make any decision, first discuss it with your loan servicer or financial advisor before making a decision to determine whether consolidation is suitable for your financial situation and repayment goals.
Continue reading:
What happens if I make extra payments on my student loans?
What happens if I miss a student loan payment?
How can I qualify for student loan forgiveness under the SAVE plan?
