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All About Student Loan Consolidation

If you’re juggling a handful of student loans from your college or graduate school days, the idea of consolidating to a single loan with a single payment may sound like a great deal. Before you rush off to consolidate your student loans, though, you should know about the pros and cons of this method of paying off student debt. Approach loan consolidation with caution. 

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What Is Student Loan Consolidation?

The word consolidation might make you think that you’re combining your several student loans into one loan. In a sense you are, but you’re also taking out a new loan. When you consolidate your student loans you’re taking out a new loan that covers the sum of all your previous loans. The lender for your new loan pays off your old loans and you’re free to concentrate on your new loan.

Student loan consolidation rates vary depending on whether the loans you want to consolidate are federal or private student loans. You can’t consolidate private loans into a federal loan. Got private loans? You’ll need to consolidate them with another private loan.

Got public loans? You can consolidate them with a public loan and it’s to your advantage to do so as opposed to consolidating public loans into a private loan. Private student loan consolidation companies may be willing to consolidate your federal loans, but you should stick with federal loan consolidation and steer clear of private lenders.

How to Consolidate Private Student Loans

How to Consolidate Student Loans

Private student loans can be particularly expensive. The more loans you have when you leave school, the harder it is to keep your head above water. Loan consolidation is intended to help overwhelmed graduates lower their monthly student loan payments. You can do this by getting a lower interest rate (when available) or, more likely, by extending your loan repayment term. For example, if pre-consolidation you were on track to pay off your loan in 15 years, post-consolidation you may be looking at a 20-year timeline.

If you have private student loans that you want to consolidate, you’ll have to shop around for a new private loan. There are various student loan consolidation companies and regular banks that offer consolidation loans. Shop around until you find a loan that will either lower your interest rate, lower your monthly payment or both.

The rate available to you will depend on your credit score and on prevailing interest rates at the time of your application. If you’re going to get a private consolidation loan you’re better off doing so at a time when interest rates are low. The catch is that private consolidation loans generally come with variable interest rates, so your interest rate could rise over time.

Some variable-rate loans are better than others when it comes to their maximum rate and the number of years you have before your rate starts to increase. Opt for a fixed rate if you can get one and if not, choose your variable-rate loan carefully.

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How to Consolidate Federal Student Loans

How to Consolidate Student Loans

Consolidating federal student loans is a different story. A federal consolidation loan is required by law to have a fixed interest rate that depends on the weighted average of all of your loans. That’s one of the biggest advantages. Another advantage of federal consolidation loans is that they can unlock eligibility for three repayment programs: Income-Contingent Repayment Plan, the Pay As You Earn Plan and the Income-Based Repayment Plan.

If you have a mix of student loans, with some of them eligible for Public Service Loan Forgiveness and some of them not, consolidation brings good news and bad. The good news is that your payments after consolidation will all be eligible for PSLF. The bad news is that you’ll lose credit for any qualifying PSLF payments you made on your Direct Loans before consolidation. You could always leave those Direct Loans out of the consolidation process, however.

As with private consolidation, you may end up paying more over your lifetime if you consolidate your federal student loans. You’ll have to weigh that consideration against the benefits of added simplicity and lower payments.

If you decide you want to consolidate your federal student loans, go to and submit a Direct Consolidation Loan Application. The application process is free. You’ll be asked to submit the application and a promissory note indicating that you want to consolidate the loans you list and that you agree to repay the new loan. You will also be asked to choose a repayment plan. The government estimates that this process should take you about 30 minutes.

Related Article: 3 Reasons Banking on Student Loan Forgiveness is a Bad Idea

Bottom Line

If you can afford your student loan payments now and you’re not in danger of default, you might be better off skipping loan consolidation. Why? Because loan consolidation can leave you paying more over time, lock you into an inflexible repayment program or stick you with a variable interest rate.

If you’re considering consolidating because you don’t like having to deal with your various student loans, you can try automating your payments. Automating your payments through direct debit takes the pressure off you to remember and keep track of each loan. It frees up the time and mental energy you would otherwise devote to monitoring each of your debts.

As we’ve seen, it’s not just a matter of how to consolidate student loans, it’s a matter of whether you should consolidate those loans. As with any debt consolidation, you’ll need to balance the positive effect of having lower payments now against the potential negative effect of paying more interest over the life of the loan. A student loan consolidation calculator can help you balance these considerations, but the final decision will come down to your current financial circumstances and your expected future earnings.

Photo credit: © iStock/Oko_SwanOmurphy, © iStock/Sadeugra, © iStock/EricFerguson

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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