Pros and Cons of Federal Student Loan Consolidation

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Chris Snellgrove

By Chris Snellgrove

May 6, 2020

The best thing about federal student loans is that they help you complete your education. The worst thing about them is that they must be paid back, plus interest.

Student loan consolidation is one option to condense multiple federal loans (which may have multiple interest rates) into a single loan. Doing so has a number of pros and cons, and it’s important to understand them all before you make your decision.

Understanding Student Loan Consolidation

Below, we’ve listed the most important pros and cons of student loan consolidation. Before we go any further, though, it’s important to define what federal student loan consolidation really is.

The concept is pretty simple: you take out one large loan (the consolidation loan) and combine all of your other qualifying federal student loans into it. The end result is that you are making a single monthly payment to a single lender for the lifetime of the loan.

Federal loan consolidation is different than refinancing. Refinancing means you are refinancing into a new, private loan. Refinancing federal student loans means a loss in all of the irreplaceable federal benefits that go along with it. These include an option for student loan forgiveness, an option to base your payments on your income, an option to pause payments if you lose your job or have an economic hardship, and potential for widespread cancellation.

Now that you know how student loan consolidation works, let’s dive into the different pros and cons.

Pros of Student Loan Consolidation

Extra Time For Payments

One of the obvious benefits of consolidation is that you can get extra time to pay the debt off. This ranges from 10-year terms for loans lower than $7,500 to 30 years for loans more than $60,000.

Lower Payments

Federal student loan consolidation may lower your monthly payments in one of two ways. First, the extended time to pay the loan off may result in lower payments. Second, federal consolidation means you are now eligible to pursue an income-driven repayment plan that could significantly lower monthly payments.

Save Your Credit

Consolidating federal debt into one loan with a new term does more than extend your time and lower your payments. If you were having trouble making payments before, consolidation can help you avoid going into default and/or jeopardizing your credit score.

Cons of Student Loan Consolidation

May Owe More Interest

The flip side of having more time to pay a loan is that the interest has more time to grow. By the end of the consolidated terms, you may pay far more in interest than under the original loan terms.

You May Not Come Out Ahead

Most students consolidate because they dream of saving a lot of money. But the truth is that this is unlikely to happen if you only make minimum payments.

Doing so will increase how much interest you pay over time. Your new interest rate is based on a federal weighted average instead.

Loan Forgiveness Issues

Many student loan borrowers are pursuing some form of loan forgiveness. Most of these plans last for a certain number of years (such as 10 years of qualifying payments for the Public Service Loan Forgiveness program). If you have already made any qualifying payments, your forgiveness “clock” restarts with loan consolidation.

Loss of Benefits

Depending on what your current loan is, you may lose certain benefits that go along with it. Understand your current loans, what benefits they have, and if you will lose them when consolidating.

A good place to start:

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