Should You Consolidate Your Student Loan Debt?

Worried woman looking at bills
By Abby Hayes

If you're making separate student loan payments on each of your five or 10 student loans, you may want to consider consolidating your loans. Student loan consolidation can help get rid of the headache caused by keeping all those payments straight.

But even though student loan consolidation streamlines your student loan repayment, it might not be the best option for you. Before applying for a consolidation loan with the Department of Education, you should know the advantages and disadvantages of student loan consolidation.

Advantages of Consolidation

Beside the single monthly payment, which is very convenient, a consolidation loan may provide additional student loan repayment plans. Most government-backed student loans offer at least a couple alternative repayment plans, but consolidated loans offer a variety of options, including income-based repayment plans.

With a standard repayment plan, a consolidation loan may lower your total student loan payment. This is often because a consolidation loan's standard repayment plan can set you up to repay your loans in 15 to 30 years -- %VIRTUAL-article-sponsoredlinks%instead of the 10-year standard repayment plan for individual loans.

Also, the overall interest rate of your student loans may be lower when you choose consolidation. When figuring the fixed interest rate for a consolidation loan, your lender will use the weighted average of your current loans' interest rates, rounded up to the neared 1/8 of a percent. This fixed interest rate may lower your overall student loan interest rate.

Many older nonconsolidated student loans operate on a variable interest rate, and the rate can change every year on July 1. A consolidation loan's fixed interest rate means you make a predictable payment, even if student loan rates change. And if you lock in a low interest rate before the rates jump up in a rising-interest environment, you'll have even more of an advantage.

Disadvantages of Consolidation

One of the biggest issues with student loan consolidation is it can actually cause you to pay more in the long run. This is especially true if you extend your repayment terms, which can easily tack on tens of thousands of dollars' worth of interest payments.

Also, if you happen to consolidate during times of falling interest rates, you may actually get locked into a higher interest compared to one you could secure down the road. Once you lock in that consolidation loan rate, there's not much you can do to change it -- even if interest rates are falling all around you.

A final consideration to make when deciding whether or not to consolidate: Do your individual loans have extra perks? For instance, some lenders will reduce your interest rate if you pay on time, and other loans -- particularly PLUS loans -- offer flexible repayment options you can't get with a consolidation loan.

Which is Right for You?

Last year, Congress passed the Bipartisan Student Loan Certainty Act of 2013. The act requires that all new student loans will have a fixed interest rate for the life of the loan. The rates are still tied to the financial market, and they'll be determined in June each year. Loans taken out during the following award year (from July 1 to June 30) will have that year's fixed interest rate.

Therefore, interest rates can still vary, but you'll know before signing the promissory note on a student loan what its interest rate will be forever. This means for new student loans, the advantage of a consolidation loan stabilizing your interest rate is a moot point.

The bottom line: Sometimes consolidation loans are a good idea, but sometimes they aren't. If you're really struggling to make your student loan payments right now, a consolidation loan could save you in the short term but cost you more in the long term.

But what if you can afford your payments, are enjoying relatively low interest rates and just want the convenience of a consolidated loan? Well, you might be better off just setting up automatic payments for each of your 15 student loan accounts. It's a hassle, but it will likely save you money in the long run.

Abby Hayes is a freelance blogger and journalist who writes for personal finance blog The Dough Roller and contributes to Dough Roller's weekly newsletter.

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Should You Consolidate Your Student Loan Debt?

One solution is to take advantage of some of the loan forgiveness opportunities that are already out there. The military, the federal government, and state governments offer dozens of programs that will wipe away at least part of your debt, in return for a few years of service. Most are tied to specific, in-demand professions in areas such as health care, law enforcement, and education. but others -- like the military, the Peace Corps, and AmeriCorps -- are open to people from a variety of majors and disciplines.

American Student Assistance, a nonprofit group that helps people manage their student loan debt, has produced a free list of occupation-based loan forgiveness programs. It's worth a peek -- even if you don't plan to become a firefighter, policeman, speech therapist or social worker.

Photo: Brett Holt,

Several programs will allow you to structure your repayment of federal student loan debt based on your income. For example, if your loan payments are more than 15 percent of your discretionary income, you may qualify for income-based repayment, under which your monthly payment calculated based primarily on what you earn, and after 25 years of payments, any remaining money owed gets forgiven. Other programs, including income-contingent repayment and pay-as-you-earn forgiveness, are pegged to different income levels.
Nobody wants to die, go through bankruptcy, or suffer a total and permanent disability. However, if you experiences one of these life events, your federal student loans will be discharged. The banks behind private loans, however, may still go after your cosigners in an attempt to recoup their losses.

Assuming you're not a too-big-to-fail bank, the idea of going deeper into debt in order to make more money may sound counterintuitive. However, in many fields, a graduate degree can vastly increase earning power. "What's It Worth," a publication of Georgetown University's Center on Education and the Workforce, ranks graduate programs by their return on investment. Not surprisingly, degrees in medicine, the social sciences and hard sciences top the list.

Photo: Serge Melki,

Ultimately, student loans are like any other debt: Getting out from under them requires that you understand your situation and keep your focus on repayment. In this regard, the best advice is also the most obvious. First, be aware of how much money you owe and what the interest rates are on each of your loans. Work on paying off the highest-interest loans first, while making minimum payments on the rest of your loans. As you pay off each loan, take the money that you were spending on it and roll it over onto your highest interest loan.

But, while discipline is good, it's also important to reward yourself. Paying off loans is a big deal: give yourself a nice present every time you put one to bed!


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