The Lost Cost Trap: How to Decide If You Should Consolidate Your Student Loans

What is Student Loan Consolidation?

Student loan consolidation is the process of combining more than one student loan into one loan with one payment and one interest rate.

There are two kinds of consolidation: Federal student loan consolidation and private student loan consolidation. Only federal student loans can be consolidated into another federally backed student loan¹; private loan consolidation can include private and federal student loans. The latter is often referred to as refinancing.

Are Student Loan Consolidation & Refinancing the Same?

Don’t confuse consolidation and refinancing. All consolidation is refinancing, but not all refinancing is consolidation. It’s important to note the difference if you’re dealing with federal student loans and weigh the pros and cons of moving your federal student loans to a private lender.

Pros & Cons of Student Loan Consolidation

Like most financial decisions, there are pros and cons to weigh when considering whether or not to consolidate your student loans.

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Student Loan Consolidation Pros

• Interest rate changes for the better. Depending on your credit score and the current state of interest rates, you may find that a private* consolidation will give you a better rate than you had before. You can also move variable-rate loans into one fixed-rate loan to help keep your budget predictable and protect yourself against unexpected rate hikes.
• Longer repayment period. It may make more sense to extend your repayment timeline. While you keep your monthly payments lower you can consider putting other income into high-yield savings or paying down debts with higher interest rates.
• Lower monthly payments. Thanks to an extended repayment period, your monthly payments will be lower and easier to budget.
• Simplified debt management. Instead of remembering more than one payment due date, you just have to keep track of one. One bill, one interest rate, and servicer, one due date.

Student Loan Consolidation Cons

• Interest rate changes for the worse. If you don’t read the fine print and double check your math, you might end up with an interest rate that isn’t such a great deal when all is said and done.
• Paying for a longer amount of time. Yes, this is a pro and a con, depending on your goals, needs, and income. When you refinance, you restart the clock on your repayment period, sometimes extending it from 10 years to 30.
• Paying more. If you have any outstanding interest, it’ll be added to the principal of your new consolidation loan, and you’ll have to pay interest on this new total.

*Pros & Cons that Only Apply to Federal Student Loans

There are specific things to keep in mind when considering your federal student loan consolidation options.¹

Pros

• Choosing your loan servicer. When you apply for federal student loans via FAFSA, you don’t get to choose who your lender will be—and not all lenders are created equal. Careful considerations of your options could mean fewer headaches for you over the life of your loan.

Cons

• Giving up certain federal student loan benefits. If you’re working toward loan forgiveness by participating in an income-driven repayment plan, a consolidation—even into a new federal loan—can reset your clock to zero.
• Paying more interest. Even though your loan term will be extended in a federal student loan consolidation, your interest rate will increase—causing you to pay more money overall. Your new interest rate is calculated by a weighted average of your current interest rates rounded up to the closest one-eighth of one percent. It remains fixed for the entire term of your consolidation loan.

Sometimes the best efforts at saving for college can come up short or merit- or need-based funding doesn’t quite make ends meet—this is when student loans can mean the difference between finishing your degree and putting your educational momentum on hold. Understanding how to navigate your repayment options can unlock financial options that can help the rest of your loan term feel as painless as possible.