The student loan industry is booming so to speak—a majority of college students end up using loans to cover the rising costs of college. It’s no secret that cumulative student loan debt in the United States exceeds national credit card debt—amounting to over $1.4 trillion.
Most student loans are offered by the federal government. These loans come with a wealth of benefits, options, and other perks to help smooth out the repayment process, especially in times of need. One of those options is federal student loan consolidation – the program that allows borrower to combine multiple federal student loans into one.
What Are the Basics of Federal Student Loan Consolidation?
If you have multiple federal student loans, even if they’re with different servicers, you can consolidate them into a single loan and monthly payment. Most federal loans are eligible for consolidation; however, Parent PLUS loans cannot be combined with loans the student took out.
You’re able to consolidate your loans as soon as you graduate, leave school, or go below half-time enrollment status. In order to be eligible, you need to be in repayment status or in the six-month grace period that occurs right after your graduation.
This is important. The new interest rate on the consolidated loan will be a weighted average of the previous loans. Here’s a random, arbitrary example. If you had a loan of $5,000 at 4 percent APR, a $2,000 loan at 6 percent APR, and a $10,000 loan at 2 percent APR, then your weighted interest rate would be 3.06 percent (rounded) on a $17,000 consolidation loan. Here’s a bit more information on weighted averages.
What Are the Benefits of Student Loan Consolidation?
The first obvious benefit of a consolidation loan is that it can simplify your monthly finances. Instead of multiple payments, due dates, and interest rates, you can put everything together under one rate—and only one monthly payment. If you have a few different servicers, this can be especially helpful.
Second, if you’re having trouble making your monthly payments, a consolidation loan can offer immediate relief from those obligations. Your debt isn’t going to be forgiven with a consolidation, but you can extend your repayment term up to 30 years. By extending repayment, there are more months in the repayment term, and the monthly payment will be reduced as a result. This could help you from entering delinquency or default if managed correctly.
What Are the Downsides to Student Loan Consolidation?
Consolidating your student loans isn’t a perfect fix; there are still drawbacks. As mentioned, you can stretch out your repayment term, which translates to a higher cost overall. Anytime the term is extended, it offers a chance for more interest to accrue and compound on the principal balance.
A key sticking point of a consolidation loan is the new interest rate. Since the new interest rate is determined by weighted average, there’s no actual rate reduction on your student loan debt. Even if you didn’t extend your repayment term, the lack of rate reduction means you won’t save any money by virtue of lower interest.
If you consolidate, you could also lose some of the benefits available to federal borrowers, such as discounts on interest rates or even the prospect of loan forgiveness in some cases.
At this point you’re probably wondering if student loan consolidation is a good idea. It can be, depending on your situation.
If you have trouble juggling multiple loan payments with different servicers, looking for a simpler monthly obligation, or having trouble with your current payments, then a federal consolidation loan could be a useful tool. You could avoid entering default in some cases, or you could just make your life easier if it’s overly complicated already.
However, if you’re looking to save money over the life of your loan, then consolidating with the federal government probably isn’t the ideal choice. Given the nature of the new interest rate, you won’t be getting a discount.
At the best of times, consolidation can be a quick save if you’re struggling. In that sense, it can save your wallet and possibly your credit from taking an immediate hit. But if you’re trying to get a discount on your loans, there are other options such as student loan refinancing that may be more suitable depending on your situation.
Author: Jeff Gitlen
Student Loan Guides
Student Loan Reviews