How Student Loan Consolidation Works

The Downsides of Loan Consolidation

Some of the advantages were covered on other pages, but there are a few possible downsides to student loan consolidation that we need to mention, too. For example, extending payment time or restructuring a loan can mean more money paid over the long-term or accruing fewer benefits from paying through traditional channels.

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

  • You lose any grace period built into a loan structure if you consolidate too early. Let's say you decide to lump all your loans together the month after leaving college. The interest rate drops a tiny bit, but before your resume even reaches prospective employers, you have to begin paying your loans. Remember, consolidation rests the loan clock -- sometimes for the better and sometimes for the worse.
  • Certain loans, like the Perkins loan, have interest benefits within a tax structure. When you consolidate a Perkins loan, you lose those benefits, as well as the grace period, if consolidation occurs early.
  • You may adversely affect your extended repayment options.
  • You can only consolidate student loans a limited number of times -- usually only once.

Loan consolidation is never cut and dried. It's a financial tool that comes with risk, and you have to determine how that tool is properly used to use it to your benefit. In addition to the above considerations, there are other smaller yet still significant concerns as well.

Many lenders offer interest reductions and discounts for using electronic debiting, timely payment and other incentives for keeping up with payments. These benefits often evaporate under consolidation. Sometimes the way interest is accrued will change as well.

Finally, because of changes in lending, many lenders and loan servicers offer the same benefits of consolidated loans, like extended payment plans, without consolidation.

The best way to understand the advantages and disadvantages is to talk to a financial professional, or someone who understands the ins and outs of student loans. The sources listed below will serve to point a parent and a student in the right direction, but it will take a little time and effort to learn how the system really works and how it can work specifically for you.

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, follow the links below.

Related HowStuffWorks Articles


  • Christel, Patricia Nash. Managing Director of Communications for Sallie Mae. Personal Interview. Conducted on March 18, 2010.
  • FinAid. (April 15, 2010)
  • Sallie Mae. (April 15, 2010)
  • U.S. Department of Education. "Direct Consolidation Loans." (April 15, 2010)
  • U.S. Department of Education. "Federal Student Aid." (April 15, 2010)