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The pros and cons of consolidating your student loans

Consolidating student loans can help you save money and pay off debt faster.
July 21, 2016

By Allison Videtti

If you’re struggling under the pressure of your student debt, you’re not alone. According to the Institute for College Access & Success, 69 percent of seniors who graduated from public and nonprofit colleges in 2014 had student loan debt — to the tune of an average of $28,950. 

While you can’t outrun your student loan debt, you do have options for getting it under control. One option is to consolidate your student loans. With a loan consolidation, a lender pays off your various student loans and gives you a new, single loan, often at a lower interest rate. 

Federal student loans can be consolidated through the U.S. Department of Education. Private loans can only be consolidated through a credit union or bank. Some lenders, like Alliant, will consolidate both federal and private student loans.

If you consolidate your federal and private loans together, you may lose the protections a federal student loan affords, like deferment or forbearance, which allow you to temporarily postpone or reduce your federal student loan payments; income-based repayment programs; and potential loan forgiveness, like that offered to people who work in the public sector.

When you consolidate your federal loans through the U.S. Department of Education’s Direct Consolidation Loan program, you can extend the loan term to make your monthly payments more affordable, but you won’t see a favorable change in your interest rate. When you consolidate your private and federal loans through a credit union or bank, you could be offered a rate that is lower than what you’re paying right now. 

But, consolidating student loans is not right for everyone. Since it’s a big financial decision with long-term implications on your finances, we’ve put together a little pros/cons list that you might find helpful.

Pros of student loan consolidation

  • You’ll simplify your monthly payments. Rather than having to keep track of four or five student loan payment amounts and dates, you can consolidate them into a single monthly payment.
  • You can save on interest — which definitely adds up over the life of the loan. You can consolidate multiple higher rate loans into one lower-rate loan, especially if you have established some credit history since you graduated and have a good credit score.
  • You will have additional flexibility to find the loan that meets your needs and lifestyle.  Terms can range from five to as long as 30 years, at either a fixed or variable rate. Right now, rates are really low (as you‘ve probably heard by now).
  • You can often qualify for discounts when financing with a bank or credit union if you set up automatic payments, or have a checking or other account at the same institution. At Alliant, we offer a 0.4% discount when you set up automatic payments.

Cons of student loan consolidation

  • There are certain eligibility qualifications you have to meet to consolidate your student loans, including being employed and meeting certain income requirements. The school you attended usually needs to qualify with the lender, and you must not have serious delinquencies on your credit report.
  • You may need a co-signer, especially if you have just finished college and do not have sufficient income or credit history to qualify by yourself. (Pro Tip: Though it might seem like a hassle, a co-signer can actually help you save money. By drawing on their good credit, you may qualify for a lower rate than you would otherwise.)
  • If you refinance private and federal loans together, you can lose certain protections that government loans offer, namely forbearance and income-based repayment terms.
  • If you choose to extend your loan term to get lower monthly payments, you could wind up paying more in interest over the life of the loan. However, with some lenders (like Alliant) you can reduce your interest by making extra payments with no prepayment penalty.

Student loan consolidation can be a great option if you’re looking to simplify and lower your monthly payments, but there are other factors to consider, so be sure to do your homework. And while it’s easy to feel down about your student debt, look on the bright side: College grads earn over $800,000 more than the average high school graduate by retirement age.