One of the biggest choices any student has to make about their federal student loans is whether to consolidate or not. Consolidation is a very popular option, but it’s also one that people frequently request without fully understanding the consequences for it.
Consolidation allows you to combine multiple federal loans into one big loan. There’s no fee to consolidate online at StudentLoans.gov, so be careful not to pay an unnecessary fee to a third-party debt relief company for this. The consolidation essentially replaces your existing loans with one big, new loan, with an interest rate based on a weighted average of the rates you already have.
Why Should I Consolidate?
There are plenty of great reasons that people decide to consolidate their loans:
- Simplicity. By the time you finish your education, it’s possible to have many different loans, possibly even spread out among different companies. Consolidation lets you put them together into one place, handled by one servicer.
- Updating your loan. All new consolidations are through the Direct Loan program. If you have older federal loans and want to apply for Direct loan-only options like Public Service Loan Forgiveness or the Revised Pay As You Earn payment plan, you may need to consolidate into the Direct Loan program.
- Reducing your standard plan payments. Depending on the amount you consolidate, this option will stretch out the term of the standard payment plan up to a possible maximum of 30 years. This means consolidation will usually lower your monthly payment amount.
All of those look like pretty good benefits! So, what’s the catch? Each of those benefits carries with it a natural downside, and it’s really up to you whether the downsides will impact you or not.
Why Shouldn’t I Consolidate?
- Loss of advanced repayment tactics. Consolidation may make it harder to pay back your loans strategically. For example, if you have multiple loans with different interest rates, it might be possible to make a series of overpayments directly to the highest-interest loans and pay them off quicker than the lower-interest ones, saving you money in the long run. If you consolidate, you only have one loan with one interest rate, so you can’t pursue that strategy.
- Loss of Perkins loan benefits. Perkins loans are a special kind of federal loan with a few special benefits. They don’t gather interest when you use deferment, and people who work in certain public service areas can qualify for Perkins loan cancellation, which is one of the best forgiveness options out there. Consolidated Perkins loans lose both of these benefits.
- Payment of more interest on the standard plan. Lower payments may be easier to manage, but it comes at a price. The longer it takes to pay off your loan, the more time there is for interest to build up, which means paying more total over the life of the loan (unless you voluntarily make larger payments than the minimum they’re asking for!).
Are you wondering whether you should consolidate your loans? What questions do you have? Sign up or log in with your Salt account to post them in the comments.