Should You Consolidate Student Loans?June 14, 2023
According to Experian, the average student loan debt for borrowers in the U.S. is around $39,487. Many borrowers have multiple loans, including federal and private loans, from multiple loan servicers. In this case, managing monthly payments can get complicated. Student loan consolidation is one way to help simplify things.
Here’s what to know about consolidating your student loans and whether it makes sense for you.
What is Student Loan Consolidation?
It’s possible to consolidate federal and private student loans, either with a Federal Direct Consolidation Loan or through a private lender. Student loan consolidation involves replacing multiple existing loans with one new loan. So instead of tracking several monthly payments, you only need to focus on one. Ideally, this new loan also has a lower interest rate than you had previously.
Types of Student Loan Consolidation
Depending on the type of student loans you have, there are two options for student loan consolidation:
- Direct Loan Consolidation: Federal student loan consolidation is available with a Direct Consolidation Loan through the U.S. Department of Education, and it allows you to consolidate multiple federal student loans for free. This option is not available for private student loans.
- Private Student Loan Consolidation: Private student loan consolidation is available through private lenders, like banks or credit unions. You can opt to consolidate existing federal loans and private student loans.
The Pros and Cons of Student Loan Consolidation
While consolidating your student loans can make it easier to manage your payments, there are some other pros and cons to consider before you move forward with the process. This is especially true if you’re considering consolidating federal loans with a private lender. Here’s what to know.
Pros of Federal Student Loan Consolidation
- One payment: As mentioned, a big benefit of loan consolidation is that you’ll only need to manage one federal student loan payment instead of several. In addition to being able to consolidate your Direct subsidized or unsubsidized student loans, it’s also possible to consolidate Parent PLUS loans.
- Retaining federal benefits: If you consolidate your federal loans with a Direct Consolidation Loan, you’ll retain potential benefits like federal student loan forgiveness and get the option to qualify for an income-driven repayment plan.
- Lower monthly payments: You may end up with a lower monthly payment if you opt for a loan with a longer term. Terms of up to 30 years are available with Direct Consolidation Loans.
Cons of Federal Student Loan Consolidation
- Paying more in interest: If you choose a longer-term Direct Consolidation Loan, you could end up paying more in interest over time.
- Losing progress toward loan forgiveness: The federal Public Service Loan Forgiveness Program allows you to qualify for loan forgiveness once you’ve made 120 consecutive payments. If you consolidate your loans, your progress may be lost.
Pros of Private Student Loan Consolidation
- One monthly payment: Again, you’ll have the benefit of one monthly payment with private student loan consolidation. This can be helpful if you’re managing several federal and private loan payments each month.
- Choice of lenders: Many private lenders offer student loan consolidation, also called student loan refinancing. So you’ll be able to compare options and choose the lender that offers the best possible rates and terms.
- Potentially lower interest rate: Though not always, it might be possible to get a lower rate when you consolidate existing loans with a private lender.
Cons of Private Student Loan Consolidation
- Extended loan term: If you choose to consolidate with a private student lender, you could end up with a longer loan term. While this may mean a lower monthly payment, it also means you’ll be paying off your loans for a longer time.
- Higher interest payments: A longer loan term may also mean that you’ll pay more interest over the life of your loan.
- Sacrificing potential benefits: When you consolidate federal loans using a private loan, you’ll give up potential benefits like possible student loan forgiveness or a more affordable repayment plan.
Is Student Loan Consolidation a Good Idea?
Student loan consolidation can be a good idea if you’re struggling to manage and track your monthly payments or you have high-rate loans. Consolidating will provide the benefits of a single—and potentially lower—monthly payment. But it’s important to weigh the pros and cons of consolidation to determine if it’s the best choice for you.
If you decide to move forward with consolidating, ensure you do your due diligence to avoid student loan consolidation scams. Generally, student loan consolidation is something you can do on your own for free, so be wary of companies that reach out and request payment in exchange for consolidating your loans. Also, watch out for robocalls and calls from individuals claiming that they’re with the U.S. Department of Education.
Student Loan Consolidation vs Refinancing
You may hear the terms ‘student loan consolidation’ and ‘student loan refinancing’ used interchangeably. While the two concepts are similar in that they can replace multiple loans with one, there are some important differences between student loan consolidation vs. refinancing.
If you have federal loans, you can opt to consolidate them with a Direct Consolidation Loan. You cannot consolidate private loans with a federal loan. When you consolidate your loans this way, you’ll retain your federal student loan benefits, such as potential loan forgiveness. While simplified monthly payments and retaining federal benefits are positives, you probably won’t get a lower rate when you opt for a Direct Consolidation Loan. Your new loan rate is the weighted average of all your previous rates rounded up to the closest 1/8th percent.
Private student loan consolidation, often called refinancing, is also an option. With this option, you can consolidate federal and private loans and enjoy simplified monthly payments. You may also benefit from a lower interest rate, depending on the lender you choose. But you won’t retain your federal student loan benefits if you consolidate or refinance with a private lender.
Despite potential drawbacks, it could make sense to refinance with a private lender if doing so will simplify your payments or result in a lower, more manageable monthly payment due to a longer term. Again, weighing the pros and cons is important before you move forward.
Consolidate Your Student Loans with ELFI
If you’ve decided to consolidate your student loans, ELFI offers fixed and variable consolidation loans with low rates and flexible terms. You’ll need a steady income and a credit score of 680 or above to get approved. Alternatively, you could also work with a cosigner that meets these requirements if you’re concerned you won’t qualify on your own. Student loan consolidation with ELFI can be a great choice if you want to simplify—and potentially reduce—your monthly student loan payments.