Loading
Tap on the profile icon to edit
your financial details.

4 Reasons to Avoid Consolidating Your Student Loans

When you’ve got student loan debt, your number one priority is likely to be getting rid of it as quickly as possible. Consolidating your loans can help you streamline your monthly payments. But for some borrowers, that’s where the benefits end. If you’re on the fence about consolidating, here’s why you might want to think twice about combining your loans.

Check out our student loan calculator

1. You Could Forgo Certain Loan Benefits

Federal student loans come with built-in perks that private loans don’t offer. That includes things like the ability to participate in loan forgiveness programs, forbearance periods and income-dependent repayment plans. If you consolidate your federal loans through a private lender, you say goodbye to all of those extra benefits.

While some private consolidation lenders offer forbearance or deferment periods in the event of a financial hardship, those options aren’t open to every borrower. Even if the private lender is offering you a better deal on your interest rate, you still have to consider whether it’s worth it to lose your federal loan benefits.

2. It Could Cost You More Money in the Long Run

4 Reasons to Avoid Consolidating Your Student Loans

Locking in a lower rate on your loans is obviously an advantage but it comes with downside risk if it involves extending your loan payment period. Depending on your lender, the only way to see a reduction in your rate might be to opt for a longer loan term. Adding on extra years could cancel out anything you’re saving by getting the lower rate.

Let’s say you have three loans totaling $30,000 with an average interest rate of 6.5% and you’re on a standard 10-year repayment plan. If you consolidate your loans and lock in a rate of 4.5%, you might need to stretch out your loan term to 20 years. Once it’s all said and done, you’ll likely end up paying a lot more interest. When you run the numbers, getting a lower rate might actually take more money out of your pocket. But if consolidating is all that’s standing between you and default, it might be worth it.

Related Article: How to Consolidate Student Loans

3. The Best Rates Aren’t Guaranteed

If you’re planning on consolidating your loans with a private lender, be prepared for them to take a close look at your credit score. Your credit factors into the application process and if yours isn’t that great, the rate you get likely won’t be either. In some cases, you might not be able to qualify for a consolidation loan without bringing in a co-signer.

4. Your Rate Can Change

4 Reasons to Avoid Consolidating Your Student Loans

Private lenders typically give you the option of choosing a fixed or variable rate for a consolidation loan. Variable rates tend to start in a lower range but there’s a catch. If the index that the rate is tied to changes, your rate will too.

As long as interest rates are low, you can save more than you would with a fixed-rate loan. But once the rates rise, your monthly loan payments could be significantly higher. If that happens, you’d have to either wait it out until the rate goes back down or refinance your loans to try and get a better deal.

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

The Takeaway

Before you move ahead with student loan consolidation, it’s a good idea to be clear about what your goals are. If you want a lower loan payment, you’ll need to weigh that against the cost of interest when considering a longer loan term. Looking at it from every angle can help you decide whether consolidating your loans is the right move.

Photo credit: ©iStock.com/DeanDrobot, ©iStock.com/SIphotography, ©iStock.com/baona

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
Was this content helpful?
Thanks for your input!