Updated on 04.28.16

Student Loan Consolidation Guide

Saundra Latham

Student loan consolidation may not be the silver-bullet solution that it used to be, but it can still offer some benefits depending on your situation.

First and foremost, if you’re juggling multiple student loan payments, student loan consolidation can simplify your finances. When you consolidate your student loans, you roll them all into one bigger loan. That means you have just one loan to pay off and keep track of instead of several, and that can help reduce the chance of a late or missed payment. There’s also the possibility that you could secure a lower or fixed rate on your student loan debt.

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Consolidating my student loans about a decade ago was one of the best financial decisions I ever made, but a lot of things have changed since then. In this guide, we’ll take a look at the current pros and cons of consolidation, including what is probably the most important question: Will it truly save you any money?

Key Findings on Student Loan Consolidation

If you’re pressed for time, here’s a quick summary of the major points I drive home in this guide:

  • The best reason to consolidate student loans is to stay organized. If making one payment on one big loan instead of five separate payments on five smaller loans will help you stay organized and prevent missed or late payments, consolidation is worth it.
  • Consolidating federal student loans issued after 2006 with a federal student consolidation loan will not save you any money, because your loans already have fixed rates. You may be able to lower your monthly payments by choosing a longer repayment term, but this will cost you more in the long run.
  • Consolidating your loans with a private lender has the potential to save (or cost) you more depending on current interest rates. You’ll need good credit (or a cosigner with good credit) to qualify for a good interest rate. A variable-rate loan will have a lower interest rate at the outset, but it could rise over time. A fixed rate will be higher to start, but you won’t have to worry about it changing and costing you more money later on.
  • In general, steer clear of consolidating federal student loans with a private lender, unless you get an unbeatable rate. Federal student loans have many valuable fringe benefits that private loans don’t offer.

The Rising Cost of College and Student Debt

The price tag of a college education is more daunting than ever. According to The College Board, the cost of one year at a private, four-year college has jumped 146% in the past three decades to $31,231, while the cost of a four-year public school has skyrocketed 225% to $9,139. Those figures are adjusted for inflation — they would be even gaudier if not — and they include only tuition and fees, not living expenses.

It’s no wonder then that student loan debt is on the rise, too. In 2013, 59% of graduates from four-year public colleges had borrowed money to help get them through school, up from 52% in 2001. Their average debt load was $25,600, up 24% in a decade, according to The College Board. Throw private school grads into the mix, and the average American owes $29,000 in student loans, according to Equifax.

It’s important to remember that these numbers are averages — some students manage to earn their degrees with far less debt. On the flip side, some accumulate a lot more. But wherever you are on the spectrum, being an informed borrower can help you stay organized, figure out the best way to pay back your debt, and maintain a reasonable lifestyle while you’re doing it.

Student loan consolidation is one possible way to help you do that — but only if you’re realistic about its benefits and limitations.

How Do I Consolidate Student Loans? What are the Pros and Cons?

Simply put, student loan consolidation lets you roll your many school loans into one big loan. The single loan pays off all of the smaller ones, leaving you to pay off the single, bigger loan. There are two main ways to do this: through Uncle Sam or a private lender.

Federal Student Loan Consolidation

Federal consolidation loans are for — you guessed it — federal student loans. You can consolidate almost any federal student loan using the Direct Consolidation Loan program. However, you cannot include any loans from private lenders, and you cannot include any PLUS loans borrowed by your parents on your behalf. (For a rundown of the different types of federal loans, see our resource on the best student loans.)

You can consolidate your federal loans any time after you graduate, leave school, or drop below half-time enrollment, and you probably won’t have to undergo a credit check to do it.

The interest rate on a federal student consolidation loan is fixed for the life of your loan, but varies from person to person. That’s because it’s based on the interest rates of the loans you’ll be consolidating. You’ll pay the weighted average of those rates rounded up to the nearest 1/8th of a percentage point. (I’ll explain this in more detail later on in this article.)

Private Student Loan Consolidation

Various private lenders also offer consolidation loans. Some even allow you to include federal student loans in a private consolidation loan.

If you don’t have a long or strong credit history, as is the case with many students and recent graduates, you may not qualify, or you might be required to get a cosigner with better credit to secure a better interest rate.

Your interest rate on a private consolidation loan can be fixed, or it can be variable. We’ll cover this in more detail later in the post.

Pros and Cons of Student Loan Consolidation

In general, there are a few notable advantages and disadvantages if you decide to consolidate your student loans.

Consolidation Benefits

  • Convenience is the major advantage of student loan consolidation. Depending on how many loans you’re juggling, keeping track of just one bill and payment due date instead of several can be a big relief, especially if you’re a recent student who isn’t quite used to the monthly grind of paying bills and managing your finances.
  • You may get to choose a repayment plan that fits your financial situation better. For instance, federal student consolidation loans offer several payment plans that take your income into account.
  • Finally, consolidating may leave you with a lower total monthly payment than what you were paying on your loans separately. In a few cases, it can also save you money in the long run, although that’s an unlikely scenario with federal consolidation.

Drawbacks of Consolidation

  • The chief drawback to student loan consolidation is that you may pay more money over the life of your loan if you decide on a longer repayment schedule to make your monthly payments more manageable.
  • Just as you may gain repayment plan options with consolidation loans, you may lose access to other repayment plans or benefits such as interest-rate discounts or loan forgiveness, forbearance, and deferment options. This can be a particular concern if you consolidate a federal student loan with a private lender, as federal loans are typically set up with far better borrower protections than private loans.
  • Consolidating your student loans often means you’re locking in your interest rate. This can be a pro or a con, depending on what interest rates are doing and whether your loans already have fixed rates. But given that you can consolidate only once, it’s a factor worth some forethought.

Does Student Loan Consolidation Save Money?

In truth, this oft-touted benefit of student loan consolidation really depends on your new interest rate and any fees the lender charges. When lenders claim they can save you money with student loan consolidation, they often mean they can lower your monthly payments by stretching out your term — say, from 10 years to 20 years. Quite often, that actually means you’ll pay more money in the long run.

To fully answer this question, we’ll look separately at whether consolidating federal student loans and private student loans will save you money.

Can Federal Consolidation Save You Money?

First, a personal story: I consolidated about $17,500 in student loans in 2005 after finishing graduate school. Back then, federal student loan rates were still variable, and in 2005, interest rates were at historic lows.

In my situation, this made consolidation a no-brainer. I was able to consolidate all of my federal student loans during my grace period at a 2.875% interest rate, which was then locked in for the life of my loan and remains the interest rate I pay today. Had I not consolidated, I could have been paying 7.14% starting in 2006 and 7.22% in 2007 before rates dipped back down to 4.21% in 2008.

Since 2006, however, all federal student loans have been issued with fixed interest rates for the life of the loan. This means that federal student loan consolidation won’t save you the money that it saved me.

I was able to take advantage of a historically low interest rate and lock it in — otherwise, my variable rate would have continued to bounce around. But today, unless you’re including older loans that still have high or variable rates, consolidating federal student loans will simply combine loans that already have fixed interest rates. You could see a minor savings, or you could end up paying a tiny bit more — this is because of the way your new interest rate will be averaged and rounded. Either way, it’s a negligible amount.

Let’s look at an example. Say you have three federal student loans:

  • Loan A is a $10,000 loan that you took out in 2010 at a fixed 4.5% interest rate.
  • Loan B is a $10,000 loan that you took out in 2011 at a fixed 3.4% interest rate.
  • Loan C is a $5,000 loan that you took out in 2012 at a fixed 6.8% interest rate.

Consolidating these loans will leave you with one loan for $25,000, at an interest rate based on the weighted average of the three loans’ interest rates, rounded up to the nearest 1/8th of a percentage point. The weighted average means the high rate on the smaller $5,000 loan counts less than the others.

In this case, the new interest rate on the consolidation loan would be 4.625%. (Here’s a tutorial on how to do the math, or you can use this Direct Loan Consolidation Program calculator to estimate your new interest rate more quickly.

If you paid off each loan separately using a standard 10-year repayment plan, here’s what your payments and total amounts paid would look like:

Monthly payment Total repaid
Loan A ($10,000 at 4.5%) $103.64 $12,436.56
Loan B ($10,000 at 3.4%) $98.42 $11,810.13
Loan C ($5,000 at 6.8%) $57.54 $6,904.83
Total $259.60 $31,152.52

The total is more than $31,150 when we add up the amount paid on each separate loan with a standard 10-year repayment plan, at a combined monthly payment of about $260.

Using this FinAid loan payment calculator, let’s compare the $25,000 consolidation loan with a 4.625% interest rate. By consolidating, you’ll actually pay $31,272 over the life of the loan with a monthly payment of $260.61. As you can see, consolidating actually costs you about $120 more in this case — about a dollar more a month for 10 years.

A Note on Longer Repayment Terms

My example above compares paying down your loans separately versus paying down a consolidation loan, but it keeps the repayment term the same. Consolidating and then lengthening your loan term will lower your monthly payment — but you’ll likely pay more in the long run.

If you decide to pay off that $25,000 consolidation loan over 20 years instead of 10, your monthly payments would drop to about $160, freeing up an extra $100 a month. This can be helpful if you’re falling behind on other bills or need to tackle high-interest credit card debt, and you can always start paying more than the minimum due on your loan once you’re in a better financial position.

But if you take all 20 years to pay it back, you’ll pay $38,366 over the life of the loan — a full $7,000 more than you would have paid on a 10-year repayment schedule.

Can Private Student Loan Consolidation Save You Money?

Some banks and other non-government lenders will consolidate your student loans, and a handful will allow you to mix in some federal student loans as well. (Remember, however, that the reverse isn’t true — you can’t consolidate any private student loans using a federal consolidation loan.)

If you’re thinking of consolidating both types of loans through a private lender, you’ll want to weigh the pros and cons carefully. Traditionally, federal student loans offer better interest rates and perks — such as more repayment plans and hardship options like deferment and forbearance — than private loans do; this is especially true for students with poor or little credit history. Consolidating a federal loan into a private one means you may lose some or all of those benefits.

When you apply for a private consolidation loan, your credit is the key in determining the kind of interest rate you’ll receive — and, therefore, whether consolidation will save you money.

If you’re a recent student with poor credit or a very short credit history, it can be tough to qualify for a good rate without a cosigner who has good credit. A cosigner basically guarantees that if you can’t pay back your loan, he or she will pay it for you. That makes getting a cosigner a tricky proposition, and one that should be a last resort — it can ruin relationships in the event that you leave someone else on the hook for your debt.

Variable or Fixed Interest Rates: Which Are Best?

As I mentioned earlier, you won’t need to consider this if you’re using the federal student loan consolidation program: Your interest rate will be fixed. However, the water is a little muddier if you’re looking to consolidate loans through a private lender, many of which also offer variable interest rates that can go up and down. Here are some pros and cons of each to consider.

Fixed-Rate Consolidation Loans:
  • Have a higher interest rate than variable-rate options, at least initially. The lender knows they won’t be able to capitalize on interest-rate hikes down the road, so this is the price you pay for security.
  • Are ideal for budgeting, because you know your payment will be the same from month to month and year to year. It’s easy to plan ahead.
  • Might be the best choice if you value the security that comes with knowing your rate (and therefore your payments) won’t change.
Variable-Rate Consolidation Loans:
  • Have a lower initial interest rate — but that rate can change. Your rate will be pegged to an interest-rate index (or a set number of percentage points above such an index). Because the index fluctuates over time, so will your interest rate — and, therefore, your monthly payment. This can work in your favor when interest rates go down, but it can become costly when rates climb. (Some loans have a rate cap to protect you from paying over a certain amount if rates climb dramatically.)
  • Are not as ideal for budgeting since your payment can change along with your interest rate.
  • Might be the best choice if you’re willing to risk the long-term security of a fixed rate for short-term savings, or if you can pay off your loan in a reasonably short time to capitalize on the low initial rate.

You’ll want to see what index your variable loan rate will be tied to; often it will be the federal prime rate or the one-month London Interbank Offered Rate (LIBOR). The prime rate has held steady at 3.25% since 2009, a low unmatched since the 1950s. The LIBOR, at 0.18% today, is starting to gradually rise in 2015 after hitting historic lows last year.

Most experts agree that interest rates have nowhere to go but up, but how much and how fast they may rise is an open question.

Private Student Loan Consolidation: Two Examples

Consolidating your student loans can look pretty different depending on whether you opt for a variable-rate or fixed-rate consolidation loan. Below, I explore these two scenarios with the same set of loans.

Example 1: Fixed-Rate Private Consolidation Loan

First, let’s look at consolidating your loans with a private lender who offers you a fixed-rate consolidation loan.

In this example, let’s assume you have three private student loans: Loan D, a $5,000 loan at a 5% interest rate; Loan E, a $10,000 loan at 8%; and Loan F, a $15,000 loan at 12%. Assuming a 10-year repayment plan, here’s what the monthly payments and total amount repaid on those loans would look like:

Monthly payment Total repaid
Loan D ($5,000 at 5%) $53.03 $6,364.03
Loan E ($10,000 at 8%) $121.33 $14,559.16
Loan F ($15,000 at 12%) $215.21 $25,824.38
Total $389.57 $46,747.57

As you can see, paying each of these loans separately means close to $390 in monthly payments and a total amount paid of over $46,700.

Perhaps you decide to consolidate your loans. You have pretty good credit and qualify for a fixed interest rate of 7.5% on your new $30,000 loan. If you can stick to the 10-year repayment term, consolidating at this interest rate will mean a monthly payment of about $356 and a total repaid of about $42,730. That’s savings of about $34 a month and $4,000 over the life of the loan, according to this FinAid repayment calculator.

Example 2: Variable Rate Private Consolidation Loan

Maybe your same good credit means you qualify for a 4% variable interest rate on that $30,000 consolidation loan. The math is trickier, but we can use this adjustable-rate mortgage calculator to simulate what could happen with a variable-rate student loan.

Let’s assume your interest rate stays at 4% for a year, and then it begins to climb 1% a year until it hits a rate cap of 10%. (Most lenders will have a rate cap in place on variable-rate student loans to protect you in case rates rise an inordinate amount.)

Again, assuming a 10-year repayment plan, you’ll make payments ranging from a low of about $304 a month to a high of about $365 a month, and total payments of about $41,460. As you can see, in this particular scenario, the variable rate resulted in the most total savings, even though interest rates rose while the loan was in repayment.

In both scenarios, we made two crucial assumptions: First, that you are creditworthy enough to qualify for an interest rate on the lower end of the spectrum, and second, that you can stick to a standard 10-year repayment plan for your consolidation loan instead of lengthening the term.

If you cannot qualify for a low interest rate or keep your repayment term reasonable, private student loan consolidation will probably not save you any money — in fact, it could cost you a lot more in the long run.

Also remember that a variable interest rate is a gamble that becomes riskier the longer it takes you to pay off your loan. Always check to see what kind of rate cap is in place to protect you.

How Does Student Loan Consolidation Affect Your Credit Score?

Like most big financial decisions, student loan consolidation can affect your credit — but not so significantly that it should be a major factor in your decision.

Consolidation can make it easier for you to make on-time payments since you won’t be juggling as many separate bills. Staying on top of payments and making them reliably each month is a tried-and-true way to raise your credit score over time, as it demonstrates to creditors that you’re a responsible borrower.

There are a few ways consolidation can hurt your credit, too, but they are minor. If a lender makes a hard inquiry to check your credit — basically the formal process of running your credit score to see if you qualify for a loan — it can drop your credit score a few points. As long as several lenders aren’t making hard inquiries around the same time, the damage will be negligible and short-lived, though.

It’s also possible that replacing your old loans with a new one can hurt your score by lowering your average account age. That’s because 15% of your credit score is based on the length of your credit history.

In the long run, consolidating and paying down your loan on time will actually raise your credit score as you prove your ability to handle debt responsibly.

Six Strategies for Paying Off Student Loans Faster

By now, you’ve probably realized that consolidation offers few guarantees when it comes to saving money on your student loans. Fortunately, there are several strategies that can do just that.

Before you embark on any aggressive student loan repayment plan, remember to cover your other financial bases first. That means being able to pay your bills, but it also means having an emergency fund, beginning to save for retirement, and prioritizing debt that has an interest rate higher than your student loans. Remember that your student loans are likely to have lower interest rates and more favorable payment terms than many other kinds of debt — especially credit cards.

For example, if you have $10,000 in credit card debt with a 19% interest rate, it makes little financial sense to spend your extra money attacking a student loan with a single-digit interest rate when you’re only making minimum payments on the credit card debt.

Strategy #1: Choose the shortest repayment term you can manage.

Your loan’s repayment term is how long you have to pay back the loan. Ten years is standard, but it’s not uncommon for recent graduates to extend their term to 15, 20, or even 25 years to keep their monthly payments low. This is a particular temptation with student loan consolidation, since your new monthly payment can look quite intimidating once your loans are combined.

Choosing a longer loan term can give you some relief in the form of lower monthly payments, which can help you make faster progress paying down higher-interest credit card debt. Unfortunately, it significantly increases the total amount you pay back over the life of the loan, since interest continues to accrue on the unpaid balance.

Let’s go back to Loan A, the $10,000 federal loan with a fixed interest rate of 4.5%. Here’s how the loan term affects how much you’d pay monthly and over the life of the loan:

Term length Monthly payment Total repaid
10 years $103.64 $12,436.56
15 years $76.50 $13,769.83
20 years $63.26 $15,184.32
25 years $55.58 $16,675.80

As you can see, we can cut our monthly payments in half with the 25-year term, but the price we pay to do so is more than $4,200 over the life of the loan.

Strategy #2: Pay more than you need to each month.

Again, let’s return to Loan A. Under the standard 10-year repayment plan, you would pay just under $104 a month for a total of $12,437 over those 10 years. But here’s what would happen if you paid just a little bit extra each month, according to this prepayment calculator:

Monthly payment Total paid Time saved Total saved
$113.64 (an extra $10) $12,158.34 13 months $278.27
$123.64 (an extra $20) $11,937.99 23 months $498.62
$153.64 (an extra $50) $11,485.78 45 months $950.83
$203.64 (an extra $100) $11,072.91 65 months $1,363.70

As you can see, paying just $10 more a month saves a few hundred dollars over the life of the loan, and you’ll be free of it a year earlier. If you can be really aggressive, paying an extra $100 a month can save you more than $1,300 over the life of the loan — and you’ll have it paid off in just four and a half years instead of 10.

Strategy #3: Prioritize your most expensive loan.

Taking advantage of this strategy, also known as the debt avalanche, assumes you haven’t consolidated all of your loans, because you’ll be attacking the loan with the highest interest rate most aggressively.

In this example, we’ll go back to Loans D, E, and F. Loan D was the $5,000 loan at 5%, Loan E was a $10,000 loan at 8%, and Loan F was a $15,000 loan at 12%. Assuming a 10-year repayment plan, here’s what the monthly payments and total amounts repaid on those loans would look like:

Monthly payment Total repaid
Loan D ($5,000 at 5%) $53.03 $6,364.03
Loan E ($10,000 at 8%) $121.33 $14,559.16
Loan F ($15,000 at 12%) $215.21 $25,824.38
Total $389.57 $46,747.57

Say you decide you can pay more than $390 a month because you want to pay off the loans faster and reduce the total amount of interest you pay on them. You look at your budget and decide you can spare $550 a month to attack your debt — that’s roughly an extra $160 a month over the required payments.

If you attack the highest-interest loan first (Loan F), you’ll be putting roughly $375 toward that loan each month (the minimum $215 plus the extra $160) while keeping the other payments the same as in the table above. According to this debt avalanche calculator, you’ll now be able to pay off Loan F in only four years and four months instead of 10 years.

Once you’re done with Loan F, you turn to Loan E. After 51 months of paying $121.33 a month, your balance is about $6,693. Now you have about $497 to throw toward Loan E (that’s your $550 loan payment budget minus the minimum monthly payment for Loan D, which you’re still paying). It will take just 15 more months to pay off Loan E at this rate.

Finally, you turn to Loan D, which is at about $2,560 after paying $53 a month for 66 months. Now you can blast it with the entire $550 a month, which means you’ll need just five more months to pay off Loan D.

By paying a bit extra each month and prioritizing the loans based on their interest rates, you can pay them off in six years instead of 10 — reclaiming four years of your life where you won’t have to make any student loan payments. More importantly, you’ll save more than $8,000 in total interest compared to what you’d pay with a standard 10-year repayment plan.

Strategy #4: Prioritize your smallest loan.

Again, this strategy assumes you haven’t consolidated all of your loans, because you’ll be attacking the loan with the smallest balance first. This method is also known as the debt snowball.

We’ll again use Loans D, E, and F for this example. You have the same extra $160 a month above those minimum monthly payments to attack your loans. This time, however, you start with the smallest balance: Loan D, the $5,000 loan at 5%. Throwing the extra $160 at it each month, on top of the original $53, means you’ll have it paid off in just two years, according to this debt snowball calculator.

Once that’s paid off, you turn your focus to Loan E. The balance is about $8,582 after making the $121.33 payments for two years. You can now redirect all the money you were paying toward Loan D and apply it to Loan E, on top of the minimum payment you’ve been making all along. Paying $335 a month, it will be history in another 28 months.

Finally, you move on to Loan F. The balance is about $10,472 after making those $215 minimum payments for 52 months. Without the other loans to bother with, you can throw your whole $550-a-month budget toward it, and you’ll have it paid off in another 22 months.

By paying a bit more each month and attacking the smallest loan first, you’ll have all three loans paid off in 74 months instead of 120 — just a bit more than six years. You’ll also save about $6,000 in total interest.

The results aren’t quite as good as with the debt avalanche plan, but they still make a huge difference. Because you get the psychological thrill of paying off two loans completely early on, you may be more motivated to stick with the aggressive payback plan — which is why some financial experts recommend the debt snowball over the avalanche method.

Strategy #5: Exploit any available discounts.

Some lenders will offer small breaks on your interest rate. The most common discounts are for setting up automatic payments, making on-time payments over a certain period of time, or having other existing accounts with the lender. Some lenders will waive any existing loan origination fees. Make sure you know which discounts your lender offers so you can make sure you take advantage of them.

Strategy #6: Explore student loan forgiveness.

It’s possible to get a portion of your federal student loans forgiven — that means you don’t have to pay back a certain amount. Of course, this very tempting possibility comes with some hefty strings attached, but you’ll want to investigate your options nonetheless.

Forgiveness is a possibility if you embark on a career in public service, join the military, move to certain locations, or volunteer with certain organizations.

The Bottom Line on Student Loan Consolidation

When it’s all said and done, is it worth it to consolidate student loans? Maybe — or maybe not. Here’s a summary to help you make the best decision.

  • Consolidating your loans with the federal student loan consolidation program will not save you (or cost you) any significant money. That’s because federal student loans borrowed after 2006 already have fixed rates, and your new interest rate will simply be a weighted average of the old ones.
  • Consolidating your loans with a private lender may save you or cost you. Having a shot at savings will require very good credit (or a credit-worthy cosigner). A tempting variable rate can be risky unless you know you can pay off your new loan in a relatively short time; fixed rates eliminate the risk of rising payments but will be slightly higher.
  • If you have a hard time keeping track of your finances, juggling multiple bills, and remembering payment due dates, student loan consolidation is absolutely worthwhile because it will help you stay organized, decreasing your chance of falling behind on payments.
  • It’s unwise to use consolidation as an excuse to dramatically lengthen your repayment terms. If you do this, you will pay more interest over the life of the loan. Choose the shortest term you can manage.
  • You can save a substantial amount on your student loans using strategies that don’t require consolidation, such as paying more than you’re required to each month. Variations on this strategy include paying down your highest-interest loan first, or targeting the smallest balance first. If you want to give either of those tactics a go, you won’t need to consolidate.

For the most part, the days when you could expect to save a significant amount of money just by consolidating your student loans with a lower interest rate are long gone. But there are still many reasons to consolidate, such as simplifying your payments, locking in interest rates on any private loans, or extending your loan term to lower your monthly payment — which can give you some more financial breathing room each month, but may cost more in the long run.

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