Student loan debt is an issue for many Americans. Some people spend decades repaying their loans and end up repaying far more than they borrowed. There’s more than one way of tackling student loan debt, one of which is student loan consolidation.
Here at Addition Financial, we often talk to our members about issues related to student loan repayment and that includes debt consolidation. We’ve created this guide to help you understand what student loan consolidation is, how it differs from refinancing and what the pros and cons of consolidating student loans are. Here’s what you need to know.
What Is Student Loan Consolidation?
Student loan consolidation is one of the most effective strategies of student loan repayment because it allows borrowers to combine multiple loans into a single loan with a lower monthly payment.
If you apply for loan consolidation, you’ll have the option to consolidate two or more federal student loans into a single loan. Federal loans can qualify for consolidation but it’s not possible to consolidate a private student loan can’t, and and the same goes for personal loans.
How Does Student Loan Consolidation Work?
A Direct Consolidation Loan offers a path to student loan repayment that may allow borrowers to save money on their monthly payments. The process is simple. Here are the steps you’ll need to take if you decide to consolidate your loans:
- Identify loans that are eligible for consolidation: A federal student loan is eligible, private and personal loans are not.
- Log in and complete the free application: You’ll have the opportunity to select a repayment plan and a student loan servicer for your new loan.
- Wait for your loan to be processed: You should expect the process to take about six weeks.
- Review your Loan Summary Statement: The statement should include the loan amount, your weighted average interest rate, your repayment schedule and your repayment term.
You’ll have 10 days to review your Loan Summary Statement and cancel your loan consolidation if you change your mind. After 10 days, your loan consolidation will be complete and you’ll start making payments.
What Is the Difference Between Student Loan Consolidation and Refinancing?
One of the questions that we’re asked most frequently about student loan repayment is whether there’s a difference between student loan consolidation and student loan refinancing. The short answer is yes, but let’s go a bit deeper than that.
Student loan consolidation is an option that’s available for federal student loans only. Borrowers may combine some or all of their outstanding loans to get a lower monthly payment. The repayment term may end up being longer than the original term and may result in higher total payments.
Student loan refinancing, on the other hand, is just like other forms of refinancing. You’ll need to go through a lender and there are likely to be fees involved that aren’t present with loan consolidation. If you can meet the qualifications set by your chosen lender, you can qualify for a lower interest rate and a lower monthly payment. You can also choose your repayment term (within the lender’s parameters) to suit your financial circumstances.
The biggest difference between student loan consolidation and student loan refinancing is that consolidation is free and refinancing is not. Consolidation is also easier to qualify for. There’s a chance you might lose access to some features of your federal loans with consolidation, but you’ll still have the option of student loan forgiveness or switching to an income-driven repayment plan. That’s not the case with student loan refinancing.
Who Should Consider Consolidating Their Student Loans?
Now, let’s talk about who can benefit from student loan consolidation. It’s not the right choice for everybody, but it may be the right choice depending on your financial situation. Here are some questions to ask to help you decide whether loan consolidation is the best option for you.
You’re Frustrated Because You Have Multiple Monthly Loan Payments
One of the reasons that people pursue student loan consolidation is because they have multiple loans to repay with different loan servicers. It can be time-consuming and overwhelming to make several payments each month and loan consolidation means you’ll have a single payment with a single loan servicer.
You’re Worried About a Variable Interest Rate
If you have student loans that you took out prior to July 1, 2006, they may have variable interest rates. Loans issued after that date have fixed rates but if you took out loans in different years, you may have different interest rates for each loan. With loan consolidation, you can take those variable rate loans and get a fixed interest rate instead, something that makes your payments predictable and may save you money in the long run.
You Don’t Have Unpaid Interest Due to a Forbearance or Deferment
It’s important to note that if you have a balance of unpaid interest because you received a student loan deferment or forbearance, the unpaid interest will be added to your principal balance at the time of your consolidation. Borrowers with a lot of unpaid interest are likely to see a higher monthly payment as a result.
What Are the Pros and Cons of Student Loan Consolidation?
Now, let’s review the pros and cons of student loan consolidation. If you have a Direct Loan, it can be consolidated as can other types of federal student loans. This information can help you weigh your options and make the right decision for your financial situation.
Pros of Student Loan Consolidation
Here are some of the upsides of student loan consolidation for you to consider.
#1 Lower Monthly Payment
When you consolidate your loans, you may end up with a lower total monthly payment than you had originally. That can make it easier for you to make on-time payments without going over your budget.
#2 You Can Choose a Repayment Plan That Suits Your Needs
If your monthly payments are too high, then consolidating your loans makes it possible to choose a new repayment plan that fits within your budget. There are some downsides to choosing a longer repayment period (see below) but if you’re struggling to make payments, getting more time to pay off your loan can be beneficial.
#3 Fixed Interest Rate
Many older student loans have variable interest rates. Worrying about increasing interest rates can add to your financial stress. If you consolidate, you’ll get a new loan with a fixed interest rate, making monthly payments stable and predictable.
#4 You May Retain Access to Income-Driven Repayment Plans and Loan Forgiveness
Consolidating some student loans may give you access to new income-driven payment plans. If you have loans that aren’t Direct Loans and you choose to consolidate, you may be able to qualify for a new income-driven repayment plan or even loan forgiveness after you consolidate.
#5 No Application Fee
When you apply for federal student loan consolidation, there’s no application fee. You can complete the application online at no charge. That’s something that sets student loan consolidation apart from refinancing, where you would need to pay an application fee.
#6 You Can Choose Your Loan Servicer
When you first applied for student loans, you didn’t have the opportunity to choose your loan servicer. When you consolidate, you do have that option. You can choose to work with any approved loan servicer for your new loan.
#7 You Can Avoid Late Payments or Default
Making late payments or missing payments on your student loan will lower your credit score. Defaulting on a loan is even worse for your long-term financial wellness. With student loan consolidation, you can avoid negative outcomes by putting your monthly payment within reach for your budget.
Cons of Student Loan Consolidation
There are some downsides of student loan consolidation as well, including the following concerns.
#1 Higher Total Interest
Loan consolidation typically leads to a longer repayment plan than you had on your original loans. That may be helpful for your budget, but it can also mean that you’ll pay more in interest over the term of your loan. If you’re concerned about the overall cost of your loans, that’s something to keep in mind.
#2 May Lose Credit for Payments Made on an Income-Driven Repayment Plan
Any borrower who has been making payments on an income-driven repayment plan may lose credit for the payments they’ve already made. What that means is that if you still need an income-driven plan, you may be starting from scratch in terms of qualifying for student loan forgiveness. There’s an exception if you apply for loan consolidation before the end of 2023.
#3 Unpaid Interest Will Be Added to the Loan Principal
Borrowers who have received a deferral or forbearance for student loans should be aware that any unpaid interest on their original loans will be added to the loan principal of the new consolidation loan. Unpaid interest will impact your monthly payment amount, so it’s important to be sure that the new payments fit into your budget.
Get Affordable Student Loans with Addition Financial
If you’ve got multiple student loans and you’re struggling to make monthly payments, then student loan consolidation might be the right choice for you. You can use the pros and cons we’ve listed here to evaluate loan consolidation as an option and make the best decision for your financial circumstances.
Are you shopping for a student loan with an affordable rate to pay for college or graduate school? Addition Financial is here to help! Read about our student loans and apply today.
Posted on Dec 8, 2023
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