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How Student Loan Consolidation Works

The Downsides of Student Loan Consolidation

student loan consolidation
There are some drawbacks to consolidating student loans, so you should always check with a student loan adviser to be sure the benefits outweigh the disadvantages. martinedoucet/Getty Images


Consolidating your student loans — whether they're federal of private — is the equivalent of creating a new loan, so there are times when it might not be beneficial.

Here are a few things to consider before consolidating student loans:

  • Consolidation typically increases the period you have to repay your loans, which might sound like a good thing, but that means you'll make more payments and pay more in interest, too.
  • Also, any outstanding interest on loans you consolidate gets tacked onto to balance of the new loan's principal. That can translate into more accrued interest over time, too.
  • Finally, if you lose any special benefits like interest rate discounts or principal rebates associated with your current loans if you consolidate, you might want to reconsider.
  • Consolidating federal loans is free. However, there may be charges to consolidate and refinance multiple private student loans. Private loans are also usually tied to your credit rating, and a poor credit rating can mean higher fees, and higher interest rates.

Loan consolidation is never cut and dried. It's a financial tool that comes with risk, and you have to determine how that tool can be used to your benefit. The best way to understand the advantages and disadvantages is to talk to a financial professional or student loan adviser — someone who understands the ins and outs of student loans.

The best advice is to understand what you will be paying before you even consider student loan consolidation. As they said in high school, "Don't forget to do your homework." In this case, it just may get you on your way to a better financial future.

For more information about loan consolidation and other related topics, check out the links below.

Last editorial update on Feb 24, 2020 04:28:26 pm.

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