Consolidating Student Loans
“The more the merrier” applies to things like cookies, party guests, and puppies – but definitely not student loans.
Loan consolidation is when you take two or more loans and combine them into one payment. This option is available to some types of federal loan borrowers. Here are some benefits of consolidation:
- One monthly expense: When you consolidate applicable loans, you will go from multiple payments to just one. As you can imagine, this can drastically simplify your financial obligations.
- Fixed interest rate: You will have a fixed interest rate, which is a weighted average of your combined loans’ interests. The amount may even be lower than what you pay currently. For instance, if one loan has a 6.8 percent interest rate and your second is 7.8 percent, your new rate would be 7.3 percent. This could save you money, depending on the debt amount.
- Default recovery: Even if you’ve defaulted on one or more loans, you can combine them. This can be a feasible way to get out of collections and on track for an income-based repayment plan.
The Fine Print
Here are a few ways combining your payments could backfire:
- Use one-time opportunity: You can only consolidate once (unless your last consolidation was more than 10 years ago), so you get one shot to do it right.
- Forfeit benefits: Once you consolidate, the prior loans and their benefits no longer exist. This is important to consider if you will be giving up special interest rates or possible cancellation eligibility.
- Reset forgiveness credit: If you have been on a payment plan which may allow for Public Service Loan Forgiveness or Income Driven Forgiveness you will lose any credit you have already accumulated and start the clock over.
- Pay higher amount: You may end up paying more over time with a consolidation. This is because the new joined loan extends the repayment term, creating a longer time to collect interest.
Consolidation is just one of many solutions to address your student loan debt concerns. And for many Americans with multiple student loan payments, the benefits outweigh the risks. Speak with a Student Loan Advisor for help determining your top priorities and finding the plan that works for you.