Should I consolidate my student loans?

Stack of money with diploma on top
The average college graduate in the U.S. leaves school owing more than $22,700 in student loans.

The average American college graduate with student loan debts owes more than $22,700 -- and two out of every three graduates leaves school with not only a diploma, but with education debts.

Depending on how many years you attended school -- including undergraduate and graduate work -- and your financial situation at the time, it's possible to have accumulated more than one student loan while on campus. Loan consolidation can help you lower your monthly payments, may help you defer or save you from defaulting on your loan, and may give you more time to repay (as much as 30 years). Federally guaranteed education loans are managed through the U.S. Department of Education and their Direct Loan program. Direct Loans are consolidated into Direct Consolidation Loans.


Direct Consolidation Loans come in different flavors. Consolidating loans through a standard repayment plan offers student loan holders a fixed monthly payment (monthly payments may go as low as $50) over a fixed period of time (10 to 30 years), determined by how much you owe. There are also plans that offer graduated repayment schedules, extended repayment and fixed monthly payment options, as well as flexible plans such as pay-as-you-earn programs and income-contingent repayment plans for low-income loan holders.

There are a few things that make you eligible for a consolidation loan. First, and perhaps the most obvious, you need to have at least one federal student loan such as a Subsidized or Unsubsidized Federal Stafford Loan, Direct PLUS Loan, PLUS Loan that is part of the Federal Family Education Loan (FFEL) Program, Federal Perkins Loan, Federal Nursing Loan, Health Education Assistance Loan or Supplemental Loan for Students (SLS) [source: Federal Student Aid]. Your loans can be either in a grace period (a period when you're not making payments) or in repayment; loans that are in default can be consolidated through special repayment plans, either through an income-contingent repayment schedule or income-based repayment plan. Let's talk about the advantages and disadvantages of consolidating student loans, next.


Pros and Cons of Student Loan Consolidation

In addition to one convenient, fixed monthly payment, a Direct Consolidation Loan also offers some debt-reducing benefits. These benefits include consolidation loans with no determined minimum or maximum amounts, no consolidation fees, and anything but a one-size-fits-all payment structure. Consolidating loans may also give you additional deferment options. A Direct Consolidation Loan allows you to keep your subsidy benefits on any subsidized loan debts you include in your consolidation, and borrowers with older (pre-2006), variable-interest education loans are eligible for fixed interest rates. (A variable interest rate may look good at first, but it has the potential to skyrocket during your repayment period, whereas fixed-rate loans have the same interest rate through the life of the loan.)

Consolidation comes with its benefits, but it also has its disadvantages.


Let's first talk about how extending your payment plan may lower your monthly payments but hurt you in the long run. Any time you take more time to pay off a loan, you end up paying more in the end. Why? Because while you may not be signing any additional loan documents, interest continues to accrue on your debt, and the more time it takes you to pay the more interest you'll end up paying. This also means that if you're close to your payoff date, at least within a year or two, consolidation may be a waste of time and money.

Also keep in mind that when you consolidate your student loans, you may lose some or all of the benefits you may have had with your original loans. What kind of benefits? Your current loans may have perks such as interest rate discounts, principal reduction discounts, or fee rebates among other money-saving benefits. Once you consolidate your loans, the old loans are paid off and accounts are closed; you're left with a single Direct Consolidation Loan.


Alternative Student Loan Consolidation

Signatures on a loan document
If you signed a loan with a private lender instead of through a federal program, that loan isn’t eligible for inclusion in a Direct Consolidation Loan.
©Ingram Publishing/Thinkstock

Every year, Americans apply for more than $100 billion in federal education loans, but not all student loans are through the U.S. Department of Education -- Americans also apply for $10 billion in alternative student loans each year [source: FinAid]. Alterative student loans are private student loans, and Americans collectively owe about $165 billion in private student loan debt [source: O'Shaughnessy]. While private student loans can't be consolidated with federally guaranteed loans in a single Direct Consolidation Loan, there are options for consolidating your private loans -- let's talk about the pros and cons.

Interest rates on federally guaranteed education loans and consolidation loans are determined by the government, but when it comes to private loans. you might be able to score a rate lower than the Direct Consolidation Loan can offer its customers. Lenders determine whether or not you're eligible for a private consolidation loan (and at what interest rate) based on what they see in your credit report -- the higher your credit score, the better a candidate you appear to be to lenders.


Private student loan holders with good credit -- or credit that has improved since the loans originated -- may find consolidating private education loans comes with a better, lower interest rate. Options include private consolidation loans, of which most will have a variable interest rate as well as variable minimum and maximum loan limits, fees and rules. Some home owners consolidate their education debts with a fixed-interest rate home equity loan. If you're a home owner comfortable using your house as collateral against your student loan debt, then this might be for you.

If you have both private and federal education loans and are considering consolidating them into a single private loan, borrower beware: For the most part, federal loan programs offer rates and benefits that private lenders just can't beat. It's best to consolidate federal loans through the U.S. Department of Education and private loans through private consolidation lenders (of which, as of 2013, there are a limited number).


Lots More Information

Author's note: Should I consolidate my student loans?

My, how times have changed since I borrowed money for college. Not the part where Americans owe billions of dollars in education loans -- that doesn't seem to have changed much -- but the array of options available for applying, repaying and consolidating federally guaranteed student loans today seems not only more flexible, but also helpful and useful.

Related Articles

More Great Links

  • Federal Student Aid. Direct Consolidation Loans. (Feb. 8, 2013)
  • FinAid. "Student Loans." (Feb. 8, 2013)
  • O'Shaughnessy, Lynn. "A new way to shring private student debt." CBS News Money Watch. 2012. (Feb. 8, 2013)
  • Randall, David K. "Tips On consolidating Student Loans." Forbes. 2009. (Feb. 8, 2013)
  • U.S. Department of Education - Federal Student Aid. "Loan consolidation." (Feb. 8, 2013)