Should I consolidate my student loans?

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.

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).