Managing many student loan payments at once can be very difficult. That’s why student loan consolidation sounds so enticing. You can streamline your payments into one and make it easier on yourself. It sounds like the perfect solution. However, it’s essential to think about student loan consolidation pros and cons.

Before you start the application process, you should learn about the pros and cons of student loan consolidation so you can make the best decision possible. Lucky for you, this article is your guide to all things consolidation. Let’s get into it.  

What is Student Loan Consolidation? 

Student loan consolidation is the process of combining all your federal student loans into one. This is done through a Direct Consolidation Loan that you’ll apply for. A Direct Consolidation Loan is a form of Direct Loan offered by the government. 

If you noticed that this sounds similar to student loan refinancing, you wouldn’t be the only one. Many people see consolidation and refinancing as the same thing. The reality, though, is that they’re pretty different. Here are a few differences. 

  1. You can only consolidate federal student loans. Meanwhile, you can refinance both federal and private student loans.
  2. While an advantage of refinancing is the possibility of a lower interest rate, you probably won’t get that with consolidation. When you consolidate your loans, they will average all of your loan interest rates together and then round up to the nearest ⅛ percentage. This means it will most likely stay the same or go up. 
  3. When you consolidate, you’ll retain access to all of your federal benefits. Some loans, like the Federal Perkins Loans, need to be consolidated to access those benefits. Meanwhile, refinancing your federal loans would cause you to lose them. 

Pros of Consolidating Student Loans 

Simplifies Managing Your Debt

One advantage of student loan consolidation is it simplifies your debt payment. If you have multiple student loans, you understand how hard it can be to pay each one on time. By consolidating, you’ll only have one student loan instead of several. That way, you only worry about making a single payment per month. 

Can Extend Your Repayment Term

When you consolidate, there is the possibility of getting an extended repayment plan. This extended plan can provide you the extra needed time to be able to pay off the loan. Plus, with an extended repayment, usually comes a lower monthly payment. 

Can Lower Your Monthly Payment

As we mentioned, you might be able to lower your monthly payment when you consolidate. Typically, this will only happen if you get a longer loan term. This is because you’ll have more time to pay off the same amount of money, so you’ll pay less monthly. 

For example, paying a $100 loan off in two months means making $50 monthly payments. If you extend the loan term to five months, then you’ll only pay $20 monthly. It’s the same concept with getting a longer loan term. 

Cons of Consolidating Student Loans 

You Could End Up Paying More

Unlike refinancing, you most likely won’t get an interest rate reduction through student loan consolidation. Your interest rate will either stay the same or go up. If you do get a higher interest rate, it would add to the overall cost of the loan and raise your monthly payments. So, you might have to pay more if you consolidate. 

If You Consolidate Privately, You’ll Lose Federal Loan Benefits

When you consolidate privately, you will lose your federal benefits. This includes benefits like income-based repayment plans and loan forgiveness. So, you’ll want to think seriously about whether you’ll need these benefits or not. If you think you will, don’t consolidate privately. 

You Could Pay More in Interest

As stated, when you consolidate, you could get a longer loan term. Although a longer term can be great, it does mean that you will pay more in the long run. Why? Because there will be more time for interest to build, and that interest will add to the overall cost. 

For example, say you have a $30,000 loan with a 5% interest rate on a standard repayment plan of 10 years. Over those 10 years, you’ll pay an extra $8,184 in interest for a total of $38,184. If your loan term got extended to 20 years, then you’ll pay an extra $17,517 in interest for a total of $47,517. 

FAQ About Consolidating Student Loans 

Will consolidating my student loans hurt my credit?

No, Direct Consolidation Loans don’t have any kind of credit score requirement or even do a credit check. So, you don’t have to worry about anything popping up on your credit report. Your score will remain the same. 

If you opt to refinance and consolidate privately, you will need to pass a credit check to qualify. This may temporarily hurt your credit score.

Does consolidating student loans lower your interest rate?

No, it does not. Your interest rate will most likely stay the same or go up. When determining your interest rate, the government takes the weighted average of all your loans’ interest rates and rounds it up. 

Student loan consolidation and refinancing through a private lender,  however, will likely get you a lower interest rate.

Is it better to consolidate or refinance student loans?

It depends on your situation since each has its pros and cons. Consolidating helps you better manage your debt, but you could end up spending more money. Refinancing can help you save a lot of money and manage your debt, but you would lose federal benefits. It’s really up to you and what your priorities are. 

To help you make the decision, here’s a list of the top 4 refinance rates. Rather than searching for lenders one-by-one, we recommend starting the process with an automated student loan search tool. After you complete the free Sparrow application, we’ll show you the rates and terms you’d qualify for with 17+ premier lenders. 

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Final Thoughts from the Nest 

It’s a big decision to make, and student loan consolidation has its pros and cons. Be sure to take the time to think about it and figure out what’s best for you. That way, no matter what happens, at least you know you made the most well-informed decision. 

If you choose to take a different route instead, like refinancing, use Sparrow to help you compare refinance rates across multiple lenders. The Sparrow application will match you with what you best qualify for from our partnering lenders. A lot of them offer great refinancing options. Plus, you’ll be able to refinance your federal and private loans together. To get started, fill out the Sparrow application

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