Pros and cons of consolidating student loans

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Published on January 08, 2024 | 5 min read

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Key takeaways

Direct Consolidation Loans and private student loan refinancing helps make federal student loans more manageable by rolling several balances into a single loan product.
Consolidating federal or private student loans generally gives you a single lower monthly payment, but using a Direct Consolidation Loan also means you’ll have access to even more perks.
You could pay more interest over time if the loan term is extended when you consolidate.

Consolidating your student loans involves combining some or all of your balances into a single loan product, preferably with a lower rate and a more affordable monthly payment. Direct Consolidation Loans can be used to make your federal loans more manageable. Refinancing with a private lender can also combine federal or private student loans.

Either way, you’ll end up with one monthly payment instead of several with different interest rates.

Consolidation is a great way to stay on top of your monthly payments. Federal student loan payments have resumed, so you must start worrying about due dates again. And if you have federal loans, switching to a Direct Consolidation Loan can be necessary to access federal student loan repayment and forgiveness plans. That said, there are times when consolidating may not be the best idea.

Consolidating student loans pros and cons: Quick look

Pros

Potentially lower monthly payments
One payment per month
Access repayment plans
Retain federal benefits

Cons

Pay more interest over time
No lower interest rate
Lose progress toward federal forgiveness programs
Interest is added to your balance
Forfeiture of federal benefits

Pros of consolidating student loans

Consolidating student loans is a smart step for many federal borrowers; here are a few of the advantages:

Potentially lower monthly payments: Direct Consolidation Loans have a repayment timeline of up to 30 years, as opposed to the standard repayment period of 10 years. This longer repayment term can make your loans more manageable by lowering your monthly payment.
One payment per month: Instead of making multiple student loan payments on your federal loans, you’ll make one every month, whether you consolidate with a Direct Consolidation Loan or with a private loan. If this move helps you avoid late payments, your credit score could rise over time, and it could reduce the possibility of extra interest accruing.
Access repayment plans: Some older student loans, such as FFEL loans and Perkins Loans, are not eligible for certain income-driven repayment plans or Public Service Loan Forgiveness (PSLF) unless consolidated. Combining those loans into a Direct Consolidation Loan would open up access to those programs.
Retain federal benefits: While some borrowers may consider refinancing their loans with a private lender as a way of combining several loans, choosing a Direct Consolidation Loan instead ensures that you retain federal benefits like forbearance, income-driven repayment and hardship relief options.

Cons of consolidating student loans

While consolidating can be a useful tool, there are still some drawbacks to be aware of before making the decision:

Pay more interest over time: Choosing to pay off your loan over 30 years will lower your monthly payment but cost you more in interest over time. You’ll also be in debt for a longer period of time, which could impact other parts of your finances. However, you can choose to pay off more than your set monthly amount if your budget allows.
No lower interest rate: The primary draw of refinancing is that you can often find a lower interest rate than what you’re currently paying. But with Direct Consolidation Loans, your interest rate is calculated as the weighted-average interest rate of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. Because of this, your interest rate could be slightly higher than what you’re currently paying, which will cost you more over the life of the loan. However, you may find a lower interest rate if you consolidate with a private loan.
Lose progress toward federal forgiveness programs: Consolidating into a Direct Consolidation Loan could cause you to lose your progress on federal programs like PSLF or an existing income-driven repayment plan. Make sure to check with your servicer before consolidating so you don’t erase years of progress toward forgiveness. And if you consolidate with a private loan, you’ll lose access to those programs entirely.
Interest is added to your balance: If you have any unpaid interest on the federal loans that you’re consolidating, that interest will be added to your principal balance when you consolidate. Interest will then accrue on this higher balance.
Forfeiture of federal benefits: If you choose to consolidate federal student loans with a private loan, you lose access to federal loan benefits. These include income-based repayment plans along with flexible deferment and forbearance options.

Should I consolidate my student loans?

Consider loan consolidation carefully. Whether or not you should consolidate your federal or private student loans depends on the type of loans you have and your financial circumstances.

You should consolidate if:

You have old FFEL or Perkins Loans and want to pursue loan forgiveness.
You’re having trouble keeping track of your monthly payments.
You have a large amount of student loan debt.

You should reconsider consolidating if:

You don’t have many student loans.
You’re close to meeting the requirements for a loan forgiveness program.
You can pay off your loans quickly.
You qualify for federal loan forgiveness.

Can I consolidate my private student loans?

You can consolidate private student loans, but not with a Direct Consolidation Loan. It involves refinancing multiple private student loans with one new private loan. This could help you manage multiple payments or get a lower monthly bill.

Should I refinance or consolidate my federal loans?

One of the biggest benefits of student loan consolidation with a Direct Consolidation Loan is that it keeps your federal student loans with the Department of Education. While consolidation won’t necessarily save you money, it ensures that you retain access to benefits like hardship payment options and debt-relief programs.

That said, some borrowers may choose to refinance instead of consolidating. When you refinance, your federal loans will turn into private loans, so you’ll lose federal benefits. However, refinancing could get you a much lower interest rate on your loans, which could help you pay them off faster and more cheaply.

Before jumping to refinance, look at the entire portfolio of options offered by the Department of Education. There may be forgiveness programs you didn’t know existed that you could qualify for.

Next steps

Before applying for a Direct Consolidation Loan, consider what you stand to gain and lose. If you’re stuck on figuring out your next move, the Department of Education’s Loan Simulator can help you decide whether you should consolidate or not.

Once you’ve evaluated your financial situation and have decided that consolidating is the route you want to pursue, you’ll apply via an online application on the Federal Student Aid website.

The same applies if you have private student loans and are considering refinancing to make the monthly loan payments more manageable. Carefully assess your finances and weigh the pros and cons of consolidating your balances to decide if moving forward makes financial sense.

You can also run the numbers with a refinancing calculator to better compare the impact to your loan cost.