How Student Loan Consolidation Works

Why Consolidate?

The bewildering array of student loans often necessary to fund a few years of higher education means a graduate will walk with a small diploma and a large, complex debt. Consolidation can make dealing with the mechanics of the debt easier.

  • Consolidation offers the advantage of having to pay just one entity rather than several lenders.
  • Consolidation offers access to several repayment plans -- from extended payment plans, to graduated, to income-sensitive and income dependent options.
  • Consolidation reduces the rate on certain loans, and allows for the choice of a potentially better rate by choosing a different lender.
  • It resets the clock on some deferred loans and some loans in forbearance. It also restarts the loan repayment time.

What all this boils down to, without getting into the fine details, is that you're getting a new loan. With federal loans there's generally no cost associated with generating a new loan. However, this isn't so with private student loans, which may have costs associated with consolidation that outweigh the benefit. Private loans are also sometimes tied to the customer's credit rating and a poor credit rating can mean higher consolidation fees, and higher interest rates.

And again, the creation of a new loan is best considered from an information-rich standpoint. For example, let's say a student is within a year of paying off his or her college loans and suddenly hits economic tough times. The student can consolidate the loans, reduce the monthly payment amount by $20 and extend the payments by two years. At the end of that time he or she will likely have paid about $1,000 more in interest and principal, all to save about $500. In that case consolidation would be a bad idea.

However, even non-traditional loan consolidation requires certain criteria to be met, and those criteria are as different as each loan.