Pros and Cons of Consolidating Student Loans

Pros and cons of consolidating student loans

Once you finish college, you are likely to look at all of your student loan payments and sigh: How are you supposed to keep all of them straight? And how can you afford all those monthly payments? This is when many people start weighing the pros and cons of consolidating student loans.

Among the inconveniences of student loans is that each loan that you receive for each school year is often considered a different loan — and it has to be repaid separately, with its own interest rate. When I finished my graduate degree, I had five different student loans for attendance at two different universities, with various interest rates.

On top of that, most federal student loans have 10-year repayment terms, starting from six months after you graduate from college. That means that you have various loans, and all of them have a 10-year repayment schedule. My monthly payments, all added together, ended up being right around $600 a month.

Ouch.

So I decided to consolidate my student loans. I got a lower rate and a lower payment, since my total repayment term had been extended to 25 years. Consolidation has worked well for me, and it can work well for many students, as long as you understand the risks.

Pros of Student Loan Consolidation

The biggest advantage of federal student loan consolidation is that your monthly cash flow improves immediately. My monthly payment went from almost $600 a month to $202 a month. Much more affordable for the recent graduate trying to make ends meet.

Not only do you have a smaller payment, but your interest rate is locked in. Right now, it appears that student loan interest rates could rise soon. Congress can raise these rates regularly. If you don’t consolidate, your rate is essentially variable. When you consolidate, though, you lock in your interest rate. My rate was locked in during the summer of 2005, so I was lucky to get a very low rate.

Plus, I consolidated at a time when private companies were doing it, so I was able to get a further discount for automatic payments, and another rate reduction for 36 on-time payments. I’m paying right around 2% on my consolidated student loans.

These days, you won’t get the same deal I have on my consolidation. However, we recently consolidated my husband’s loans, and the payments dropped by half, and the rate on his loans is right around 5% fixed.

It’s also worth noting that your student loan interest payments might be tax-deductible. This can reduce your tax liability. However, your student loan interest payments are tax-deductible whether you consolidate or not.

Cons of Student Loan Consolidation

As with all loans, anytime you extend the repayment term, the more you are going to pay. This is especially true if you end up with a higher interest rate than you had before. Some commenters on this blog described how they got an 8.25% interest rate (the highest possible rate for federal student loans) after consolidating their loans, and that high interest rate has made it very hard for them to make any significant progress in paying their loans off.

Moreover, even if you wind up with a lower interest rate after consolidation, if you switch to the 25-year payment schedule, you will be in debt for much longer than you would with a normal 10-year student loan repayment. In that way, debt consolidation could slow your efforts to get out of debt.

Pay Extra on Your Student Loans

One way to take the edge off the student loan consolidation is to make extra payments when you start earning more money. You have the advantage of a lower interest rate and a manageable payment. Then, when you can afford it, you can boost your efforts to repay your debt.

When you consolidate, and then make extra payments, you have the advantage of more efficiently paying down your student debt since more of your payment goes toward reducing the principal, rather than paying interest.

Another consideration, though, is what you could earn in other ways. Since my student loan interest rate is so low, I am reluctant to speed up its repayment; investing my money offers returns that beat my low, low student loan rate. I’m more inclined to focus on my husband’s student loans than my own, since he has a higher rate.

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Bottom Line

Consider all of your options. Think about both the pros and cons of student loan consolidation. For the most part, student loan consolidation is a good move for many graduates. It makes the payments more manageable, and if you plan your repayment strategy (without keeping the loan until term), you can save money overall. But you have to do the research to make sure it is the right choice for you. As mentioned above, consolidation could result in a longer repayment term and more interest payments in future years if you do not make extra payments on top of the minimum monthly payment. You can learn more at our Student Loan Debt resource center.

Image credit: Ed Yourdon

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  • Anonymous

    Be very careful and aware of the new interest rate if you’re considering consolidation. This writer got a good, low rate, but I got a really raw deal when I consolidated back in 2001. Since my choices were essentially down to consolidation or default if I couldn’t get my monthly payments down to a more manageable level, I felt pretty trapped into taking what I was offered by the consolidation lender. I got socked with the highest interest rate possible on a federal consolidation – 8.25% – and as the writer says, this is locked in for the life of the loan. It’s the kind of viscous cycle where you can spend years and years making payments on the loan, but the balance never seems to get significantly smaller because of the absurd amount of interest you’re paying. Just a word of caution since the post didn’t mention that worst-case-scenario rate.

    • Meghan

      I am dealing with the same issue.

      • http://www.twitter.com/bwfeldman Benjamin Feldman

        Thanks to both you and Anonymous for speaking up and mentioning this issue. I am going to update the blog post to add a sentence or two about this — because I think you’re right that it needs to be a very important part of the decision.

        • Meghan

          Of course. The interest ONLY portion of my payment is $829 monthly. I am consolidated with the Department of Education, am paying under the Income Based Repayment, and qualify for loan discharge after 10 years due to the Public Service Student Loan Forgiveness program. My IBR payment does not cover the interest! I had to consolidate with DOE to do the program, but there is no real way for me to pay off the loans within a decade or two without the program. I feel a little bad about having it discharged because in every other place in my life, I pay what I owe, and all of it. But at this interest rate, it would be impossible to pay the loan off and save anything worthwhile for retirement. If the interest rate was 3%, I’d stand a chance.
          I don’t believe there’s any way to get a consolidated rate reduced after the fact. If anyone knows of a loophole, please share!

          • http://www.twitter.com/bwfeldman Benjamin Feldman

            This is very interesting. Thanks for sharing, Meghan. And yes, $829 does seem very high for only the interest portion of the payment! Wow. I’m really glad you are using the Public Service Loan Forgiveness program. Have you signed up already? We wrote a post about how to do so: http://blog.readyforzero.com/how-to-apply-for-the-public-service-loan-forgiveness-program/. And I also wanted to say — don’t feel bad for using the forgiveness program! This is a program that was put in place for a reason and you should not feel guilty about using it. Best of luck to you.

          • Meghan

            I have not filled out the Employment Certification yet, nor did I know about it, so thanks! And thanks for helping me not feel guilty. Some PF bloggers are very anti forgiveness. I have to be careful what I say. Once I move and get rid of my car in a month, my student loan debt will be the only one I have!

          • http://www.twitter.com/bwfeldman Benjamin Feldman

            Not sure why they would be anti-forgiveness! It’s a program created by your lender (in this case, the federal government). If it works for the lender, then I sure don’t see any problem with it. And I’m so glad the article was helpful. If you can share it with anyone else who might find it useful, that would be great.

  • Katie

    Benjamin, could you talk more about interest rates? I have some loans at 8.25% (from 2010) and I’ve been waiting to consolidate my loans until rates by congress go down, but my loan servicer (Nelnet) is telling me all my Federal loans are at a fixed interest rate and it won’t matter what congress does each year. I find this hard to believe as I have pretty standard Federal sub and unsubsidized loans, also a few grad plus loans– a fixed rate of 8.25% seems unheard of, when are loans fixed vs. variable? So is there anyway to lower my rate? Consolidation is supposed to take a weighted average of your interest rates and then round up to the nearest 1/8th, so how does consolidation help lower your rate? It seems to actually raise it… help…

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Hi Katie, you’re right – 8.25% seems pretty high for a student loan interest rate. And it’s true that consolidating is not always the best option. If your lender confirmed that your loans are fixed rate then they probably are. It looks like today’s interest rates on federal loans are lower than yours, however. I’d research consolidation a little more – you might be able to save money but you’ll need to get the nitty gritty details from the Department of Education. You can read more here: http://studentaid.ed.gov/types/loans/subsidized-unsubsidized. Or consider calling them directly.

    • Qppie

      I work with a student loan servicer, so I can help with some of your questions too. The dept of ed releases each year what the new interest rates will be, the changes take effect 7/1 of each year. All loans disbursed after 7/1/06 have fixed rates. It varies for Stafford loans, highest being 6.8% and plus loans are fixed at 8.5%, if yours is 8.25% it is because you are getting an interest rate reduction from your lender for something (i.e. direct debit). The rate you would actually consolidate that loan at is 8.5%. If you contact direct loans with your balances and ORIGINAL interest rate of each loan they should be able to provide you with an estimated weighted average, term and monthly payment (just have to ask the right questions when you call your servicers b/c there are soo many things offered and different details about loans to discuss that we cannot go over every single thing, but if you ask than we will =) If your loans total over $30,000 than you can request that each servicer of your federal loans extend your term to 25 years (instead of the standard 10 years). This is another option instead of consolidating. This way you are not locked to only one rate, if you get extra money than you can pay off the higher rates quicker by targeting your payments. Hope this helps you and future readers!

      • http://www.twitter.com/bwfeldman Benjamin Feldman

        This is very helpful! Thanks so much for your comment. Would you be interested in writing a guest blog post on this topic based on your experience in this field? It could be a very interesting one for our readers. Let me know if you’re interested!

        • Qppie

          No problem! I would be interested in writing a guest blog, can you provide me with more details?

          • http://www.twitter.com/bwfeldman Benjamin Feldman

            Okay, great! I will email you. Thanks!