Should I Consolidate My Student Loans?

"When does it make sense to try to consolidate student loans?"

Thank you for your question.  This is a common questions that a lot of my clients face so I am glad that you asked it.  I am quite impressed with how you worded it because a lot of people think that loan consolidation should always be at least entertained as an option.

First of all, when it comes to consolidating student loans, a line needs to be drawn between federal student loans and private student loans.  Federal student loans should be consolidated with other federal student loans.  This includes federal student loans that may have been issued by a private lender.  As you might then suspect, private student loans should only be consolidated with private student loans.  So if you have both federal and private loans, you will still have at least two payments even after consolidation.

I should also point out that if married, spouses are no longer able to consolidate student loans together.  Therefore, each spouse will only be able to consolidate their loans individually.  If each individual has both federal and private student loans, the couple may still be making four payments even after consolidation.

So yes, even with consolidation, you could still end up with four payments.  That certainly doesn’t sound very convenient.  I would point out though that the purpose of loan consolidation should not be convenience.  Even if you could get all your student loans down to one payment, convenience should not be your driving motivation.  I refer to this as consolidation for the sake of consolidation.  Even though it is more convenient, this idea may not make the most financial sense.

Let’s use just consolidated federal loans as an example.  When you consolidate multiple federal loans your consolidated interest rate will be slightly higher than the overall interest rate (weighted average for those that want to be technical) of the individual loans.  Therefore, loan consolidation for the sake of convenience is not a better deal though I would also argue it is not a bad deal either.  Where it does become a bad deal is that you no longer have an option of paying down a higher interest rate loan faster.

Let’s say you had two federal student loans: one for $5000 at 5% interest and one for $10,000 at 6.8% interest.  If you had the resources available to make extra payments, wouldn’t you want to pay down the loan charging 6.8% interest first?  You can make this decision if you haven’t consolidated the loans.  Once you consolidate, you can still make extra payments but the positive financial impact will be less than allocating the entire extra payments to the 6.8% loan and paying off that loan first.

Since I do not think convenience is a good reason to consolidate student loans, you won’t receive a better interest rate, and you can’t pay down the higher interest rate loan faster, then why should you consolidate?  Probably for the very reason you are reading this article because your student loan payments are becoming overwhelming and you may be having a tough time making ends meet because of them.  For this reason, there are several federal student loan repayment plans that allow options as to how you repay your consolidated federal loans.  The biggest impact is taking your loans that need to be paid in 10 years and paying them off over 25 years.  Obviously, your monthly payment will be significantly less.  The drawback, of course, is that you will end up paying a lot more for those student loans over 25 years than you would have over 10.  I am not going to go into detail on each of these repayment options, but if you go to the Federal Student Aid Website you will be able to learn more about each of these.  There are some definite pros and cons to doing this but if student loans are becoming overwhelming, then I would recommend exploring these options.  This article does a nice job of discussing the pros and cons of the popular PAYE and REPAYE programs.

We’ve spent a lot of time discussing consolidating federal student loans because the repayment programs offered are legitimate and can be quite beneficial but what about consolidating private student loans.  This has become increasingly difficult to do as more and more lenders are leaving this business.  The consolidated loans are available are often variable rate loans where the interest rate is subject to change.  I am not a big fan of these since in most cases, I do not think you would be improving your situation.  In my opinion the best way to consolidate these loans is to do so with a personal line of credit through a financial institution or a home equity loan.  Both of these would be fixed rate loans so you know exactly what you are signing up for and can compare this to what you are currently paying in loan payments and terms.  You would need to qualify for either of these loans, but you also need to qualify for a private loan consolidation.  I want to add that I do not generally advocate these types of loans, but this is in effect, the same thing you are doing when consolidating your private student loans.  You are paying off the old debt with a new loan.  if you can get a better interest rate and terms than you are currently paying for your private student loans, then these two suggestion are viable options.

I hope this has been helpful.  I know what a burden these loans can be but thankfully there are some good options out there.  If one of the federal repayment programs can address your concerns then these are very good options--just be cautious if attempting to consolidate those private student loans.