How to Consolidate Student Loans

Student loan debt is one of the most crushing debts for new graduates, especially in an economy where simply finding a job amidst high unemployment is difficult. Consolidating your student loans can save money on interest paid, lower your interest rate, and lower your payment. However, not all that glitters is gold. There are significant risks to consolidating certain types of loans. Learn about the pros and cons of student loan consolidation before moving forward.

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Simplify Your Finances with Student Loan Consolidation

Many college students graduate with significant student loan debt spread across multiple loans: Federally subsidized loans, Federal unsubsidized, private loans, and even their parents have loans to cover their college costs. When you are first starting out in the real world, having five different debt payments to make to five different loans can be overwhelming.

With a loan consolidation you take those five loans and pay them off with the money you receive from one big loan. That bigger loan gives you one payment which, for most, is a lot easier to focus on. You send one payment in to one processor and focus on that one goal.

To consolidate your loans you need to know:

  • What specific loans you have and how much is owed
  • Whether those loans are subsidized or not
  • What your current payment is for each loan
  • What your current interest rate is for each loan
  • Whether or not the loan is a fixed rate or variable rate
  • Whether or not your loan has special deferral or forgiveness features

Which Loans Should I Consolidate?

Generally speaking you should consolidate any loans that have a higher interest rate than one you can consolidate to.

Private Loans

Most private loans should be consolidated if you can either lower your monthly payment or interest rate. There are some risks to consolidation, which we will discuss below.

Government Loans

Some government loans should not be consolidated because you get additional options to defer payment or to even have the debt forgiven. This is why it is important to know the specifics behind all of your loans. You might even get a lower interest rate but give up some special features that could help you in the future.

Consolidation Could Cost You More Money

As great as it is to lower your monthly payment on your student loans, not all consolidations are a great financial move. A majority of consolidation loans are not fixed rate which means the interest rate fluctuates based on some measure (usually the prime rate in the market). Giving up a fixed rate loan for a variable rate can be risky if interest rates rise. (Most recently, of course, interest rates have been kept extremely low by the government and variable rate loans haven’t been a bad move.)

However, another problem lurks beneath the surface: the length of the loan term. One of the easiest ways for a loan company to lower your monthly payment is to extend the number of years you pay on the loan. It’s like taking a 15 year mortgage and refinancing into a 30 year mortgage. Your monthly payment will go down significantly, but you will pay a lot more in interest. The same is true of student loans: you might take a 10 or 15 year loan and turn it into a 20 or 25 year loan. Your payment goes down, your interest rate becomes variable, and you pay a lot longer at a higher interest cost.

How to Consolidate Your Student Loans

If you want to consolidate, there are only a few companies that still do consolidations for private loans: Chase, Wells Fargo, and Student Loan Network. Government loans can be consolidate directly at the US Department of Education. Once you have collected the data on your loans, reach out to the consolidation company you want to use and apply. Your ability to receive a consolidation is dependent on your credit score, income, and other factors — just like with any other loan.

About the Author

By , on Apr 6, 2012
Kevin Mulligan
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He's building a personal finance freelance writing career and has written for, Discover Bank, and many others.

Leave Your Comment (2 Comments)

  1. Mariae says:

    “If you want to consolidate, there are only a few companies that still do consolidations for private loans: Chase, Wells Fargo, and Student Loan Network. Government loans can be consolidate directly at the US Department of Education.”

    A great information for students. This can give students more ideas where to get a consolidated loan. Thanks

  2. Emma says:

    Good advice for dealing with a tough situation. I would also like to add that students should never borrow more than they absolutely must borrow, and they should take advantage of free money such as grants and scholarships before resorting to borrowing.

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