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Should I Consolidate My Student Loans? (Pros and Cons)

Kat TretinaPublished on

should I consolidate student loans

If you’re struggling with student loan debt — welcome to the crowd. Over two-thirds of young adults who went to college for a bachelors degree took out loans to pay for their education.

If you’re looking for a better way to tackle your debt, you may have considered student loan consolidation. But what is it? And is it right for you?

What is student loan consolidation?

People often use the terms “student loan consolidation” and “student loan refinancing” interchangeably, but they’re very different processes.

Student loan consolidation is for those with federal student loans. Under this approach, you take out a Direct Consolidation Loan for the amount of your current debt. Moving forward, you’ll have just one loan, rather than several, and one monthly payment.

Student loan refinancing is for both private and federal student loans. Instead of working with the government to take out a loan, you take out a private student loan for the amount of your old debt. Like consolidation, you’ll have just one loan to worry about rather than several. But, refinancing is different in that you’ll have a new interest rate, repayment term, and monthly payment.

5 times it makes sense to consolidate student loans

Both student loan consolidation and student loan refinancing effective strategies for managing your debt, but they have their own pros and cons you should consider.

1. You want a lower monthly payment

When you consolidate your loans with a Direct Consolidation Loan, you can extend your repayment term to as long as 30 years. With such a long repayment term, you can dramatically reduce your monthly payment, making it more affordable. You’ll pay more in interest over time with this approach, but it may be worth it to get more breathing room in your budget.

2. You want to qualify for income-driven repayment plans

One of the great perks of federal student loans is the ability to enter into an income-driven repayment (IDR) plan. Under these plans, the loan servicer extends your repayment term and caps your payments at a percentage of your discretionary income. Some borrowers qualify for payments as low as $0. And, after 20 to 25 years of making payments, your remaining loan balance will be discharged.

However, not all federal student loans — such as Perkins Loans — are eligible for IDR plans. But there’s a workaround; if you consolidate them with a Direct Consolidation Loan, you can then sign up for an IDR plan, reducing your monthly bill.

3. You’re in student loan default

If you’re in default on your federal student loans — meaning you haven’t made a payment in at least 270 days — you’ll face serious consequences. Your credit could be wrecked, your loan servicer can take you to court, and the loan servicer may even be able to garnish your wages and seize your tax refund.

Getting out of default is difficult, but consolidation can help. If you agree to make your payments under an IDR plan, you can consolidate your loans with a Direct Consolidation Loan, ending the default.

4. You want a fixed-rate loan

Some older federal student loans were variable rate loans; the interest rate can fluctuate over time. If you don’t want to deal with market changes and want a fixed rate loan, consolidating with a Direct Consolidation Loan can be a smart solution. Going forward, you’ll have one loan with a set interest rate.

5. You want to deal with just one loan servicer

When you were in college, you likely took out several different loans. After graduation, you may have to deal with multiple loan servicers, due dates, and payment amounts. Consolidation can help streamline your debt repayment. By taking out a Direct Consolidation Loan, you’ll have one loan and work with just one loan servicer.

4 times you shouldn’t consolidate student loans

While consolidating your student loans with a Direct Consolidation Loan can be a good idea in some circumstances, it’s not for everyone. Here’s four times you should skip consolidating your loans:

1. You want to save money

Consolidating your student loan generally doesn’t help you save money. In fact, you could end up paying even more. When you consolidate your debt with a Direct Consolidation Loan, any outstanding interest on the loans is added to the original balance, which means the interest may accrue on a higher loan balance than before you consolidated. And, because Direct Consolidation Loans tend to have longer repayment terms, you could pay thousands more in interest.

If you’re looking to save money, student loan refinancing makes more sense than consolidation. When you apply for a refinancing loan, you could qualify for a lower interest rate. More of your monthly payment will go toward principal rather than interest, helping you save thousands of dollars.

2. You want to pay off your debt sooner

If you want to get rid of your debt as quickly as possible, Direct Consolidation Loans probably won’t help you. Your interest rate won’t change, and your repayment term will be 10 to 30 years in length. Unless you’re willing to make extra payments, you won’t be able to pay off your loans ahead of schedule.

Instead, consider student loan refinancing. You can opt for a shorter repayment term and qualify for a lower interest rate, allowing you to pay off your loans much sooner.

3. You want a lower interest rate

With Direct Consolidation Loans, your new interest rate on your consolidated loan is the weighted average of the interest rates on your old ones. In short, your interest rate will stay about the same.

If you want a lower rate, student loan refinancing makes more sense. If you have good credit and a steady income, you could qualify for a much lower rate, helping you save money.

4. You want to apply for Public Service Loan Forgiveness

If you have federal student loans and work for a government agency or non-profit organization, you may qualify for Public Service Loan Forgiveness (PSLF). But if you’re planning on pursuing PSLF, you should think twice about taking out a Direct Consolidation Loan.

When you do so, the clock restarts on your student loans, so any payments you made before consolidation no longer count toward the 120 qualifying payments you need to make to be eligible for PSLF. However, if you have student loans in either the Federal Family Education Loan (FFEL) Program or the Federal Perkins Loan (Perkins Loan) Program, then you must consolidate them in order for those loans to be qualified for Public Service Loan Forgiveness.

Managing your loans

Student loans refinancing and student loan consolidation can be excellent tools for managing your debt. There’s no one-size-fits-all approach, so think carefully about your situation and your financial goals before deciding on a strategy.

If you believe that student loan refinancing is right for you, use Purefy’s Find My Rate tool to get quotes from multiple lenders.