Pros and Cons of Student Loan Consolidation

During the course of their career, students often take out more than one loan to be able to afford their studies. These loans might vary in amount, interest rates, and even lenders. Having to calculate which loan to pay off first to minimize interest, dealing with multiple lenders, planning for different due dates, it can all get overwhelming. There are many options to help handle the stress of student loan repayment. One often taken is student loan consolidation.

With any major decision, it’s crucial to take a step back, weigh some pro’s and con’s, and look at the big picture. First, let’s understand what student loan consolidation even means, and review its benefits, and also its drawbacks.

What is Student Loan Consolidation?

Student loan consolidation is a process by which a lender can combine two or more student loans into a single new loan. The resulting interest rate on the consolidated loan will be the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 percent. It can be done with federal loans, private loans, or a mix of both.

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A “weighted average” is a calculation that considers multiple factors in a data set. In this case, the weighted average of a consolidated loan takes interest rates, loan amount, number of loans, and the balance owed at each interest rate, into consideration.

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If Susie has a $10.000 loan with a 6% interest rate + a $20.000 loan with a 4% interest rate will have a lower consolidated interest rate than a $10.000 loan with a 4% interest rate + a $20.000 loan with a 6%.

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Each student loan case is different. At times it makes sense to consolidate loans, other times it doesn’t. Here are some pro’s and con’s of student loan consolidation. 

Pros of Student Loan Consolidation

1. Lower monthly payments: By consolidating student loans, loan holders can often lower their monthly payment amount by extending their time to repay the loan up to 30 years.

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2. Fixed Interest Rates: Consolidating loans gives the lender the possibility to convert any variable-rate loans to a fixed interest rate that will last for the lifetime of the loan, making it easier to organize payments and plan for the future.

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3. One easy payment: Instead of dealing with multiple student loan payments each month, loan holders can focus on a single loan with a single monthly payment. This can make budgeting and managing finances a much simpler task.

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4. Access to Forgiveness Options and Income-Driven Repayment Plans: Consolidating loans other than Direct Loans may provide the lender with forgiveness options such as Income-Driven Repayment Plans or Public Service Loan Forgiveness (PSLF).

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5. Get out of default: If you're in default on your student loans, consolidating them can help you get back on track and avoid serious consequences like a wage garnishment or loss of eligibility for federal student aid.

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Cons of Student Loan Consolidation

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1. Longer Repayment Period: Consolidation can lengthen the time it takes to pay a loan off. If the loan holder decides to repay on the Standard or Graduated plan, they could end up paying more in interest and have a longer payment term.

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2. Increased Interest: Any unpaid interest on the loans you consolidate is added to the original main balance of your consolidated loan, so interest may be charged on a higher principal balance than if you hadn't consolidated.

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3. Losing Borrower Benefits: If the borrower consolidates loans other than Direct Loans, they may lose some benefits associated with their current loans, such as interest rate discounts, principal refunds, or loan cancellation benefits.

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4. Losing Credit For your payments toward IDR Forgiveness: Consolidating loans will result in the loss of credit for any qualifying payments made toward IDR Plans.  If loan holders are currently enrolled in any income-driven repayment plan, the payments counted towards forgiveness will be reset to zero. 

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As with any other solution for student loans, consolidation has both positive and not so positive effects. While it may not be the best path for everyone, it can be a viable solution for the right cases.

Also, remember that you shouldn’t expect to lower your interest rates, and need to be okay with extending your payment period and paying more in the long run. It's important to carefully consider all of the factors before deciding if student loan consolidation is right for you.

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