22 Consolidating Student Loans Pros and Cons

If you took out student loans while attending college in the United States, then there is an excellent chance that there are multiple accounts that you must juggle to maintain your credit status. With the standard repayment plan in place, you could easily pay upwards of $70 per month for each open account. If you have 5+ items to service, your monthly payments could be quite high.

One of the ways to manage this situation is to consolidate all of your loans into one package. It is a method that can help to save you time and money when managing your debt because all of the various loans come into the same lending product. The average college graduate in 2016 owes over $37,000 in student loan, which is a rate that has been increasing between 3% to 6% each year.

Using the Direct Consolidation Loan program can help you to begin managing this future expense within the six-month grace period that you receive before monthly statements are due. That means you are no longer owing up to 10 different lenders – or more if you went on to graduate school.

These are the pros and cons of consolidating your student loans to consider if it is time for you to begin managing this debt.

List of the Pros of Consolidating Student Loans

1. Consolidating your student loans creates one payment.
If you are trying to manage each separate lender account on its own, then you could be trying to meet the deadlines of more than a dozen different payment due dates. Each loan will have a unique interest rate and repayment guideline as well. When you take advantage of the consolidation options that are available through the Direct Consolidation Loan program, then you can turn these multiple payments each month into one simple payment.

Although most students pay their loans online these days, you could be saving over $5 per month just in postage and envelope costs by switching to the consolidation program.

2. It is an easy way to avoid the issues that come with default.
There were over 8 million Americans who held defaulted student loans to the value of $130 billion in 2016. When this issue occurs, it is virtually impossible to secure a lending product for a vehicle or a home. You cannot qualify for federal lending assistance if a student loan is in default as well. Your credit score could be 100 points lower because of this issue. When you are facing this problem, a consolidation can help you to reduce the potential of multiple defaults by paying off those loans to create one single item.

Then you can use the repayment programs that can reduce the amount you owe based on the amount of income you earn to lower your monthly payment. Although you may have the option to go through the default forgiveness program to restore your credit, this option is available only once. This issue stays on your credit report for up to 7 years.

3. You are provided a fixed interest rate with a consolidated loan.
Many of the student loans that you received over the years were granted at whatever the current interest rate happened to be at the time. If you have lending products that were issued before 2008, then your interest rate range could be anywhere from 3.5% to 9%, depending on the products used to fund your education. When you consolidate all of your student loans into one product, then you can eliminate any variable interest rates that you face with your products while receiving a single payment that is based on the average of all the interest ratings being consolidated.

4. Consolidating your student loans can help you to lower your payments.
When you decide to consolidate your student loans into one easier repayment option, then you have several different repayment options from which to choose. Lenders allow you to extend the terms of the loan for a period from 10 years up to 30 years. If you choose the latter option, then the monthly payment that is due could be lowered by up to 50%, making it much easier to meet your obligations and build a positive credit profile. Although a long-term loan also means additional costs over the life of the product, there is always the potential to make double or triple payments when your income stabilizes.

5. You can switch your repayment plan at any time.
The standard option with a Direct Consolidation Loan offers a 10-year repayment period, which maximizes the repayment of interest and principle. You can choose the Extended option to receive a 25-year repayment period. Graduated plans start low, and then increase every two years for up to 20 years. Depending on what your financial needs happen to be, you can decide to switch between the plans that you want at any time to maintain your positive credit profile.

6. It qualifies for the student loan debt forgiveness program.
If you went to school in the late 1990s or early 2000s, then there is an excellent chance that you have a Federal Family Education Loan (FFEL) program loan that was part of your package. Some students may have received Perkins Loans as part of their educational financing as well. Although these lending products qualify for the income-based repayment option, they are not automatically part of the Public Service Loan Forgiveness program. You must consolidate these products into the Direct Loan Program to take advantage of the forgiveness, cancellation, or discharge options which are available.

Should your employment qualify for the PSLF program for loan forgiveness, then it requires 120 consecutive on-time payments based on your income to eventually discharge the debt.

7. There is no maximum or minimum amount required for the consolidation.
You are not required to meet a mandatory minimum with your student loan debt to qualify for a consolidation product. The only stipulation is that you have more than one loan that you are managing at the same time. There is not a maximum amount that you can consolidate using this program either. Even if you have over $100,000 in debt, you can still qualify for all of the benefits which are possible with the Direct Consolidation program.

8. You have access to more forbearance or deferment options.
Although a Direct Consolidation Loan is a new lending product, it will also restart the clock that you have on any forbearance or deferment opportunities that are available to you for up to three years. If you are unable to make your payments on this loan because you are out of work and looking for a job, an economic hardship or unemployment deferment can delay the requirement to make a payment for the next 36 months as well.

9. It offers the potential for multiple credit score advantages.
If you have missed a few payments on your student loans in the past, then the on-time percentage can drop below 98% for your overall profile for all debt. That is enough to drop your credit score by at least 40 points. When you consolidate these items into one payment, then there is less of a chance that you will miss something because there is only one lending product to manage instead of several. The act of consolidating also pays off the loans with negative marks, which can sometimes restore 50% to 75% of the losses you received on your profile with the missed payments.

Every credit situation is different, so there isn’t a specific positive outcome to consider. Some students may not see much of a boost at all.

10. You can have your monthly payment withdrawn automatically.
As with every other student loan product that is available today, you have the option with a Direct Consolidation Loan to create an automatic withdrawal of the amount that is due. Then you no longer need to worry about making sure that your payments are made on time. Your only concern using this benefit is to ensure that there is enough money available in checking to cover the payment.

Some banks offer discounts if you decide to set up the automatic debit feature, with the average amount being 0.25%. A handful were offering up to 1% discounts for some students after they made 36 consecutive on-time payments and the monthly withdrawals continued to support the debt repayment.

11. You get to choose who your federal loan servicer happens to be.
When you first applied for student loans through the FAFSA process or with your college or university, then there is an excellent chance that you did not receive a choice on who would be the servicer of your loan. They are all private companies that were awarded government contracts to manage this debt. When you opt for the Direct Consolidation program, you have the choice to change who services your federal loans if you are unhappy with the way your current provider treats you. There are nine different agencies from which to choose who will help you to manage your payments moving forward.

List of the Cons of Consolidating Student Loans

1. You will pay more in interest costs over time with a consolidated loan.
If you decide to consolidate and extend the term of your loan, then you could end up paying a lot more in interest costs. The longer that you wait to pay off your debt, then the more interest you will end up paying over the lifetime of the lending product. There is also the issue of paying off student loans and trying to relocate to a new city, purchase a new home, invest in a new business, or even buy a new vehicle.

Your first goal should always be to pay off the student loans as quickly as possible. There is no better way to save time and money with your debt. If this option is not available to you because of your financial situation, then a Direct Consolidation Loan may be your next best option.

2. The interest rate for your Direct Consolidation Loan rounds upward.
When you decide to consolidate all of your student loans into one lending product, then the average of the interest rates that you are currently paying will become the foundation of the Direct Consolidation Loan. If you decide to go through with this option, then your final lending product will add 1/8 of 1% to the weighted average that you have, which is equal to a 0.125% boost in what you pay. When your larger loans have higher rates during the consolidation process, then your final cost may be more than you expected when you first began the application process.

3. It is not possible to add private debt to the Federal program.
If you want to take advantage of the benefits that are possible through the use of a Direct Consolidation Loan, then you can only include public lending products that were used to fund your schooling costs. Student loans which you received from private lenders or institutions do not qualify to be part of the federal consolidation loan program. You will need to work with a private lender to consolidate these loans into one package instead.

Some banks and institutions may allow you to consolidate private debt with your public student loans to create one payment, but this option would not qualify for the Public Service Loan Forgiveness program. The interest rates on a private consolidation are typically much higher than they would be when using the Direct Consolidation Loan as well.

4. You can lose some benefits when consolidating your loans.
Perkins Loans offered cancellation as one of their features if you met certain requirements. Some other federal student lending products provided that option as well. Police officers, firefighters, and teachers qualify to have 100% of their Perkins loan forgiven when they can meet specific conditions. Although the Public Service Loan Forgiveness program could still be an option under consolidation, any specific features that were associated with some loan types go away because you’re effectively paying them off by creating a new form of debt.

That is why it is critical for you to review all of the terms and conditions of your student loan consolidation product before agreeing to the process.

5. Using a Direct Consolidation Loan removes whatever grace period you have remaining.
When you get out of school, there is a six-month grace period available before you must begin to make the monthly payments on your student loans. If you decide to use this program to create one statement instead of trying to manage several at once, then whatever time you had left after leaving or graduating will disappear. Consolidating your loans will require you to start paying them immediately, which is typically 60 days after your application receives a final approval.

The only way to manage this disadvantage is to apply for a direct consolidation product about 3-4 months into your grace period. If you apply in month 5 or 6, then you may still be required to make a payment or two before the consolidation has a chance to kick-in.

6. You will lose access to any lender benefits you may have had.
If you have student loans which were granted before the year 2008, then there is a chance that you may have a reduced interest rate or a principle reduction benefit if you meet specific guidelines, actions, or income qualifications with individual lenders. When you move all of these loans into the Direct Consolidation program, then all of these benefits go away. You may qualify for new ones with the updated lending product, but they might not offer the same current or future value that you would have had otherwise.

7. It is an option that you can only take once.
Many students decided to take advantage of the Direct Consolidation program because they saw interest rates were rising. Locking in their new loan at the lowest rate possible with it guaranteed not to change seemed like a benefit. If those rates were to go lower at some point during the repayment process, then they would be out of luck because this lending product is only available to you once.

When you combine your loans into the Direct Consolidation lending products, then it is a one-shot deal, just as the default forgiveness happens to be.

8. Some consolidation products might offer a variable interest rate.
If you have private debt that you want to consolidate into a single payment, then you need to be aware of the variable interest rates that might be part of the program you choose. Some lenders might offer you a low rate during your application process, but then require that it change when market conditions rise or fall. That means you could potentially pay less if the numbers go down, but it also means that you could pay significantly more if interest rates rise in the future. That means your monthly payments would also go up without some of the protections that you may have with public debt.

9. If you were in default, then there is no immediate credit benefit for some.
If you already went through the default forgiveness program to have this notation taken off of your credit record, then a second one will remain on your credit for the full amount of time allowed in your geographic location. Even though you can clear this issue through the consolidation process, your previous loans will simply note that you paid the item in full. The negative mark on your profile will continue to remain, even when make numerous consecutive on-time payments with the new product.

10. Any previous payments no longer count toward debt forgiveness programs.
If you need to consolidate your student loans as a way to qualify for public service loan debt forgiveness, then any previous payments that you may will not count toward your qualification. The clock starts over, requiring that you make 120 consecutive payments to qualify. If you already have several years of monthly payments in the bank with some of your debt, then it may be better to wait to consolidate until you can have the first items forgiven.

11. You could lose military-based student loan benefits.
When you serve in the military, one of the benefits is that your student loan debt often qualifies for forgiveness. Enlisting in the Navy could have you free of this obligation in just three years if you have $65,000 or less in total loans should your situation qualify. There is also the Servicemembers Civil Relief Act which can cut your interest rate to 6% for all loans you took out before joining. If you decide to consolidate these items instead, then the interest rate benefit goes away.

The pros and cons of consolidating your student loans prove that there are no hard or fast rules about this process. It is up to you to conduct your own research to determine if you would be in a better financial situation with this lending product than without it. If you want to make your payments become more manageable, save money, or qualify for potential debt forgiveness in the future, then this option is worth considering. When your goal is to pay off your debt as soon as you can, this choice might not meet your financial goals as effectively.

Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.