Is student loan consolidation the right move? How to decide

Student loans helped you invest in your future. Consolidating debt is one way to honor your investment while making your daily financial life more manageable. But it’s not the only way. Let’s explore whether loan consolidation might be a good way to handle your student loans.  Your future self will thank you for taking a mindful approach to debt.

What is student loan consolidation?

Student loan consolidation means taking a new loan and using it to pay off more than one smaller debt.

Consolidation doesn't reduce the amount you have to repay. It’s mainly a strategy for optimizing your debts. Here are some of the possible outcomes:

• Reduce the number of monthly payments you have to make 

• Get a lower monthly payment  

• Remove uncertainty by moving variable-rate debt to a fixed-rate loan

Should I consolidate my student loans?

You might consolidate your student loans if you want a more manageable monthly payment and/or you're interested in a longer repayment term. With federal student loan consolidation, for example, you could take up to 30 years to repay your loans. 

The main purpose of student loan consolidation is to simplify repayment. You could also get a lower monthly payment if you choose a longer loan term.

A lower payment might be attractive if you have a tight budget. Consolidation could help you avoid a situation where you risk default on a loan because you can't afford the payments. 

When it makes sense to consolidate

Student loan consolidation usually makes the most sense when you have multiple loans with different servicers. It could also benefit you if your loans have variable interest rates and you want to move to a fixed rate. 

Student loan consolidation could be less helpful if you've already paid down most of what you owe. With installment loans, a greater share of the interest is paid at the beginning of the loan repayment term. So if you’re well into repayment, you might try the debt snowball method instead to knock down your balances.

Federal vs. private student loan consolidation

Federal student loans come from the federal government. If you have federal loans, you could combine them through a Direct Consolidation Loan. 

Here are a few key things to know about federal student loan consolidation:

• Consolidation gives you access to income-driven repayment plans. Those plans could lower your monthly payment. 

• Your interest rate will remain the same. They use a weighted average of all the rates you were paying to your other loans. 

• Direct Consolidation Loans have a fixed interest rate that's set for the life of the loan. 

• You don't need to pass a credit check or have a cosigner to get a Direct Consolidation Loan. 

Private student loan consolidation, also called student loan refinancing, is a little different. Instead of the federal government, you get a new loan through a private lender. 

Here are the main things to know about private student loan consolidation:

• Interest rates could be fixed or variable. Variable rates mean your rate and payment can change over time. 

• Your credit standing influences your new loan rate. A credit check is usually required to qualify. Some borrowers will need a co-signer with good credit to get approved. 

• Private lenders may charge application fees, origination fees, and other fees to consolidate loans. 

• Consolidating federal student loans into a private loan makes you ineligible for government student loan benefits.

That last point is really important. 

Federal student loans give you access to benefits like income-driven repayment plans, the option to pause payments, and the potential to get loan forgiveness. Private lenders aren't required to offer any of that. If you use a private loan to pay off your federal loans, those perks go away permanently.

That's true whether you get a private student loan or use a personal loan to consolidate student debt. 

Pros and cons of consolidating federal loans

Federal student loan consolidation could help you get a better handle on your debt. We've already touched on some of the benefits, but here's a recap:

• Consolidation combines all your eligible federal loans into one.

• You could apply for an income-driven repayment plan to lower your monthly payments. 

• Consolidation could help you bring defaulted loans current. 

• You could switch variable-rate loans to a fixed rate. 

Now, there are also some downsides. 

• You could pay more in interest over the life of the new loan if the term is longer.

• Your new loan interest rate is the weighted average of the rates for your original loans. That means federal student loan consolidation can’t lower your interest costs. You could reduce the total interest cost by paying the loan off early. 

• If you're working toward public service loan forgiveness (PSLF), consolidation could affect the way your qualifying payments are calculated. 

Pros and cons of consolidating private loans

You could consolidate private student loans you already have, or consolidate federal student loans with a private loan. Here's how that could benefit you:

• If you qualify, you might be able to get a lower interest rate.

• You could move from a variable-rate loan to a fixed-rate loan, or vice versa. 

• Private lenders offer a range of loan repayment terms to choose from. So you can pick the payment that fits your monthly budget. 

• Many private lenders offer interest rate discounts. Discounts could bring down the cost of your loans. 

So what are the drawbacks of private student loan consolidation? Here's what you should know. 

• Consolidating federal loans into a private loan means you'll permanently lose valuable federal loan benefits.

• You'll typically need a good credit score to qualify for a low rate. 

• If you have poor credit or no credit, you might need a cosigner to qualify for student loan consolidation. 

• If you use a home equity loan or HELOC to consolidate your student loans, and then you’re unable to repay the home loan, you could lose your home.

If you think private student loan consolidation could make sense, compare lenders. Start with loan terms and rates, then consider the requirements to qualify next. The best consolidation loan for student debt is the one that's most affordable for you.

Be honest about why you want the loan. Some lenders have restrictions on borrowing for tuition and school-related expenses. That’s because student loans are subject to rules that don’t apply to all other loans.

Managing your student loan debt is sometimes a headache. Consolidation could help you cure it. A little knowledge about consolidation can go a long way when you're ready to take control of your debt. 

What's next

• Look at your loan statements and make note of how many loans you have, the types of loans, the interest rates, repayment terms, and monthly payment amounts. 

• Plug those details into a student loan consolidation calculator to figure out what benefits you might get by consolidating. 

Use a budgeting app like MoLO to see how a change to your loan payments might affect the amount you have left over to save or pay toward other debts each month.