When to Consolidate Your Federal Student Loans
Federal student loans are often a no-brainer for students who don’t have the money to go to college. It’s simple, right? Borrow the money and pay it back later. But after you graduate and take a look at what you owe, it can quickly boggle your college-educated mind.
You likely have more than one loan, each with its own interest rate and terms, and in some extra confusing cases, they may be serviced by different companies. That means multiple payments every month just to cover your education debt.
Consolidating your federal loans can simplify your monthly student loan struggle.
Consolidation simply combines your federal student loans into a single loan with a single servicer and monthly payment. It is different from refinancing, though sometimes you’ll see private companies use the words interchangeably. While you can refinance your federal student loans, doing so will move them into the private sphere, where you’ll lose access to borrower protections available to federal loans, such as income-driven repayment plans and forgiveness programs.
When you consolidate some or all of your loans, you essentially pay them off and take out a new Direct Consolidation Loan to pay off instead. You get a new fixed interest rate, even if you had variable rates before, which is calculated by averaging the interest rates of the loans you consolidated. Your new loan will have a term of up to 30 years, meaning you’ll have lower monthly payments but you’ll pay more in interest over those 30 years.
When to Consolidate
Deciding whether to consolidate your federal student loans can be tough. Once you consolidate, you can’t un-consolidate. That means you have to be sure you’re doing the right thing. Most often, consolidating is a good idea if your loans are over-complicated; e.g., if your loans are serviced by different servicers.
If you plan on enrolling in an income-driven repayment plan (IDR) or Public Service Loan Forgiveness (PSLF), consolidating your loans is often part of the process. Sometimes, based on the types of loans you have, consolidating is necessary to enroll in repayment programs. For example, Federal Family Education Loans are not eligible for IDRs unless you consolidate them.
Consolidation is also a method for curing defaulted loans, though you should do more research before deciding on this course of action. Consolidating defaulted loans will put you on track in an IDR, which lowers the likelihood of defaulting again, but your credit will still show that you defaulted. If you’d rather the default be removed from your credit report, look into default rehabilitation.
When Not to Consolidate
Sometimes it’s best to leave your loans separate. This is most often the case if you already have a payoff plan and separate loans work with that plan.
For example, if you’re taking advantage of any borrower benefits while you pay off your loans — such as interest reductions or principal rebates — look into whether you’ll still get those if you consolidate. Often, you will lose them.
Also, if you are working toward IDR forgiveness or PSLF, consolidating will reset the timer and you’ll have to start over. As long as you’re on track, it might be best to leave everything as is.
How Consolidation Fits Into Debt Repayment Strategies
There are two ways to approach your student loans when establishing a debt payoff strategy. You can either focus on paying your student loans or focus on your other debt and just pay monthly minimums on your student loans.
If you choose to focus on paying off your student loans, you might want to hold off on consolidating. Instead, target specific student loans — either with low balances or high interest — and knock them out one at a time. You can’t do that if you consolidate them.
However, if you choose to focus on paying down other debt, like high-interest credit card debt, consolidating your federal student loans might be a good option. Combining your student loans into one longer-term loan may reduce your monthly payment so you can put your money toward your other debt.
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