Graduating from college comes with the acknowledgement of great achievement — and, if you’re like 70% of graduates, a burden on your back in the form of student loan debt.

The average college grad leaves school with $40,000 worth of debt. But if you switched majors, transferred colleges, or went on to graduate school, you may be among the 19% that owe $50,000 and above, or the 5.6% who owe more than $100,000.

Chances are if you’re dealing with student loan debt, you’re not just dealing with one loan. Each semester, you may have taken out a new loan. And if you couldn’t cover the costs with federal loans, you very well may have turned to a private lender, such as a bank or other lending institution (e.g., Sallie Mae) to fund the rest of your expenses.

One option you have when you begin tackling your student loan debt is to explore loan consolidation. But before you head down that road, here’s what you should know.

What is Student Loan Consolidation?

If, like many college graduates, you have multiple student loans, you’ve probably heard the term “student loan consolidation” thrown around more than once when talking about repayment options. Simply put, this is the process of combining your multiple student loans into a single, bigger loan, possibly with a new lender. 

You’ll no longer owe the original loans, and since this consolidated loan is new, it will come with a new interest rate, a new payment policy, and new terms and conditions.

There are both benefits and drawbacks to consolidating your loans, which we’ll discuss in this article. Choosing to consolidate your loans is an individual choice and the right decision will depend on the specifics of your loans — the types of loans, interest rates, balances, borrower benefits, and more — as well as your current financial situation.

Pros and Cons of Loan Consolidation

It’s important to remember that there are different types of loans — most significantly, there’s a big difference between federal loans (those issued by the U.S. government) and private loans (those issued by a bank, credit union, or other lending institution).

Each has its own pros and cons, which we’ll get into in a little bit. But in general, here are some of the benefits and potential drawbacks when considering student loan consolidation.

Pros of Student Loan Consolidation

• Simplicity: Consolidating your student loans can make dealing with them a little less unwieldy, with just one or two monthly payments and one or two accounts to keep track of. (Many sources advise against consolidating private loans with federal loans — instead, they recommend that you consolidate your federal loans into one loan and private loans into another.) If you’re forgetting to make payments and have difficulty keeping track of all of your different loans, this can keep you organized and help you to avoid missing payments — which can result in late fees or damage your credit.
• Potentially lower payments: Consolidation can potentially lower your total monthly student loan payment with either a lower interest rate or longer repayment period, but this depends on the interest rates and terms of your current loans. This is especially beneficial if you’ve been struggling to make payments and can’t qualify for a deferment or income based repayment plan.
• Better credit, better rates: If you’ve graduated and gotten a (hopefully) great job, and have been making responsible financial choices such as keeping your credit card balances low and making payments on time, your credit score may have gone up. If your credit score has improved since you initially took out your loans, you may be eligible for a lower interest rate on a new consolidation loan since lenders will consider you less of a risk than you previously were. This will obviously depend on your credit history, the rates on your existing loans, and the interest rates your new lender can offer you.
• Dodge default: One in 10 borrowers has defaulted on federal loans, according to the Department of Education. If you’re in default, loan consolidation can offer a solution, since it can possibly lower your monthly payment, depending on your loans. You may be required to get your loans into good standing before being able to consolidate them, though.

Cons of Student Loan Consolidation

• Loss of benefits: Depending on your loans, you may lose certain borrower benefits if you combine your loans. Examples include loan forgiveness — where all or a portion of your loan debt can be cleared if you meet certain conditions — flexible or income-based payment options, or deferments.
• Potentially higher rates: Depending on your current interest rates and loan amounts, you can actually end up paying higher interest rates and increasing the overall amount you owe. You may end up paying more on your loans than you would have if you did not consolidate them.
• Longer repayment period: While it can lower your initial payment, a consolidation loan can lengthen the duration of your debt, and you may end up actually paying more over time.
• Beware of variable rates: When consolidating your private loans with a private lender, you may be offered a low but variable interest rate (as opposed to a fixed rate). That means the rate can increase over time — sometimes dramatically so — and therefore so can your payments.

Consolidating Federal Loans

Hopefully, you tried to take advantage of financial aid in college — specifically, federal student loans — before turning to private loans, which often carry a higher interest rate and come with fewer borrower benefits.

If you did, you may want to learn how to specifically consolidate these federal loans. The Direct Consolidation Loan allows you to consolidate multiple federal student loans into one.

Pros of Consolidating Federal Loans

• Lower payments: Consolidating your federal loans can lower your monthly payments by giving you up to 30 years to repay your loans.
• Fixed rates: The interest rate on a Direct Consolidation Loan is a fixed interest rate, which means it will remain that way for the duration of the loan. Unlike with a private loan, your new federal fixed rate will depend not on current market conditions but on your existing federal loans: Your fixed rate will be the weighted average of the interest rates on all of your loans being consolidated, rounded up to the nearest one-eighth of one percent.
• Renewed eligibility for benefits: Once you consolidate your federal loans, it “resets the three-year clock on deferments and forbearances,” according to finaid.org. If you’ve previously used up your allotted time on deferments, including unemployment and economic hardship, you will be eligible for them again. The same is true for forbearance, a period allowing you to temporarily postpone your student loan payments.

Cons of Consolidating Federal Loans

• You might pay more overall: If you lower your monthly payment by extending the duration of the loan (say, from 10 to 30 years), you may end up paying a lot more money in interest in the long run.
• Borrower benefits from your original loans can be lost: This can include interest rate discounts and principal rebates. You might lose the benefit of a flexible payment plan or other payment options such as a deferment. Consolidating can also revoke types of loan cancellation, and you may no longer be eligible for student loan forgiveness.
• Loss of grace period: If you’re in your grace period when you decide to consolidate, you lose the rest of your grace period and need to start making payments immediately, according to finaid.org. This would also include the interest benefits of a subsidized loan, where the government is paying your interest so it doesn’t accrue during your grace period.

Federal Loans Eligible for Consolidation

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Subsidized Federal Stafford Loans
• Unsubsidized Federal Stafford Loans
• Direct PLUS Loans
• PLUS Loans from the Federal Family Education Loan (FFEL) Program
• Supplemental Loans for Students
• Federal Perkins Loans
• Federal Nursing Loans
• Health Education Assistance Loans

Stipulations for Consolidating Federal Loans

• You can’t consolidate your private loans with your federal loans into a federal Direct Consolidation Loan.
• You need to have at least one student loan (Direct Loan or FFEL Program Loan) that is in repayment or in your grace period.
• You’re required to continue making payments with arrangements with your current loan servicer prior to loan consolidation, according to StudentAid.gov. Or you’ll need to repay your Direct Consolidation Loan under the Income-Based repayment plan, Pay As You Earn repayment plan, or the Income Contingent repayment plan.
• If your loans are in default, you must meet certain requirements before consolidating.
• If your parents took out a Federal PLUS loan, you can’t consolidate that in with your other federal loans.
• You can begin repayment 60 days after your Direct Consolidation Loan is disbursed or sooner, depending on your servicer.
• You can apply for a Direct Consolidation Loan through StudentLoans.gov. Continue to make payments on your existing loans until the consolidation servicer confirms that your initial loans have been paid off as part of the consolidation process.
• If you have further questions or want more information about consolidating federal loans, visit StudentLoans.gov or call the Loan Consolidation Information Call Center at 800-557-7392. The U.S. Department of Education has a lot of valuable information on federal student loan consolidation and more information on how to apply.

Consolidating Private Loans

You can choose to consolidate your private loans into one loan as well. Unlike federal loans, these loans are not managed by the government. Instead, your loan is managed by a lending institution, such as a bank, credit union, college foundation, or a state agency.

Interest rates on private consolidation loans are based on your credit and market conditions, which means your new interest rate will depend on your current credit score. So if you’ve already graduated, landed a job, and have started to strengthen your credit score, you might find that you’re eligible for a lower interest rate than when you initially applied for your existing loans.

Stipulations and rules for private loan consolidation vary by the financial institution you’re working with.

Unlike federal loan consolidation, a private loan may carry a variable interest rate, which means it — and therefore your monthly payment — can change over time.

Can You Consolidate Federal and Private Loans Together?

While you can’t combine your private student loans with federal loans into the Direct Consolidation Federal Loan, you may find that a private loan consolidation will accept your federal loans. However, most sources advise against consolidating federal and private loans together.

If you consolidate your federal and private loans with a private loan provider, you may lose your chance to enroll in income-based repayment options or to apply for a deferment if you become unemployed, experience an economic hardship, or experience other circumstances.

You may also lose your ability to explore loan forgiveness options, where all or a portion of your loan debt can be erased in exchange for joining the military, working in certain fields, volunteering, or moving to a specific location.

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