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Everything You Need to Know Before Consolidating Your Student Loans

July 8, 2015
Loans, Student Loans
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Understanding your student loans can feel like wandering through a maze. Many students and college grads have a mix of federal and private loans that carry different interest rates, repayment terms and rules on deferment and forbearance. All this confusion might make consolidating your student loans into a single monthly payment extra appealing when it’s time to pay them back.

But consolidation isn’t the best choice for everyone, especially because it can’t be undone. We’re here to make sense of the process so you can decide whether consolidating your student loans is right for you.

What is loan consolidation?

The short answer: It’s when you take out a new loan and use the money to pay off multiple student loans. You end up with just one monthly payment and a new interest rate.

The Nerdy answer: Not only does consolidating make it easier to manage your loans, but you also generally get more time to pay them off at lower monthly payments. By stretching out your repayment term, however, you’ll owe more interest in the long run.

Can you consolidate both federal and private loans?

The short answer: Yes, with a few important caveats.

The Nerdy answer: If you have at least one loan from the federal government after graduating — including direct subsidized, direct unsubsidized or Perkins loans — you can consolidate them into a single federal Direct Consolidation Loan. This comes with a few perks. The government will apply one interest rate to all your federal loans, for instance, even if they originally came with a variable interest rate (which fluctuates over time). And you can take up to 30 years to pay back a Direct Consolidation Loan.

Private loans can also be consolidated, but not by the federal government. The bank or financial firm that issued the loan (like Citibank or Sallie Mae) may consolidate them for you, or you can apply for consolidation through a bank or startup that will also refinance your private loans. When you refinance, the company assesses your personal financial situation, including your credit score, and decides whether to give you a lower interest rate on the private loans you’ve taken out.

Some consolidation and refinancing companies offer the option to bundle both federal and private loans together into one new private loan. More on that later.

What are the drawbacks?

The short answer: Consolidating might result in a loss of useful benefits on your loans that you might want to take advantage of someday.

The Nerdy answer: Make sure you understand all the fine print on each of your loans before you consolidate. If you have a federal Perkins loan, for instance, some or all of your remaining loan amount could be canceled if you work in qualifying public interest jobs. Once you consolidate a Perkins loan, it’s no longer eligible for cancellation.

Consolidating both federal and private loans into a single private loan is an option if you have good credit and a steady income.

But Terrence Banks, a credit and student loan counselor at ClearPoint Credit Counseling Solutions in Richmond, Virginia, says he recommends that his clients keep their loans separate. Federal loans often allow a host of deferment and forbearance options in case you lose your job or experience other financial hardship. Consolidating them with private loans could make you forfeit those protections under the terms of the new loan.

“It’s up to the lender,” he says. “Whereas with government loans, you have a number of different options and it seems to be more flexible.”

Also, consolidation is a one-time move. It won’t be possible to break your loans back up into individual payments if you decide later you’d rather pay them off one by one. “Once you’ve consolidated, that’s a done deal,” Banks says.

» MORE: Student loan payoff calculator

Would I benefit from consolidation?

The short answer: It’s a good idea if you have an assortment of loans that add up to more than $10,000 and you’re having trouble keeping track of them.

The Nerdy answer: A single payment every month on your federal loans and a separate consolidated payment on your private loans will help you pay them off on time, keeping your credit on track. But if you want to group them all together, consider first whether you prefer to have the option to defer payments later on, and whether your credit is strong enough to qualify.

Consolidation in any case is most useful if you have $10,000 or more in student loan debt, Banks says. Borrowers with smaller individual loans are more likely to pay them off without consolidating.

“If you have a $1,000 loan here and a $2,000 loan there, apply a little bit more and knock the loans out one by one,” he says.

What’s next?

The most important step to take before consolidating is to sit down and pore over each of your loans. Take the time to understand exactly how much you owe, which company you make payments to every month (called your loan servicer), how much you pay in interest and how long it will take you to pay off your loans at your current rate.

“That takes a little extra effort, but it’s well worth the process,” Banks says.

Then compare how much you pay now with what you’ll pay if you consolidate. When you know exactly what you’d be getting into, you’ll be much more likely to make the call that’s best for you — and your checking account.

This article was written by NerdWallet and was originally published on USA Today.

Brianna McGurran is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @briannamcscribe.