Student loan consolidation is typically a smart way for borrowers to get organized with their student loan debt. And for many borrowers, it is. But just like everything that has to do with student loan debt, there are no easy answers for everyone.
For example, when you consolidate certain types of loans, you might accidentally disqualify yourself for certain types of student loan repayment programs. Or, if you're not careful, you could end up paying more on your new consolidation loan than you would have with each individual loan.
If you're considering consolidating your student loans, make sure that you avoid these potential problems and pitfalls with student loan consolidation.
Refresher On How Student Loan Consolidation Works
Student loan consolidation is the process of combining your Federal student loans into one single loan.
For example, you might have 3 or 4 different student loans by the time you graduate college (one for every year you went to school). This can be hard to manage because you could have 3 different payments to make each month. And if you miss one, you could end up harming your credit score.
Student loan consolidation makes this easier on you by making those 3 different loans into a single loan to make payments on. This new loan is called a Consolidation Loan.
You can consolidate just about every Federal student loan into a new consolidation loan. These include:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- Direct PLUS Loans
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Supplemental Loans for Students (SLS)
- Federal Perkins Loans
- Federal Nursing Loans
- Health Education Assistance Loans
To qualify, you must have at least one loan in that is in the grace period of in repayment. You can consolidate your loans if you're in default as long as you agree to making payments under an income based plan.
But this is where some of the problems with student loan consolidation arise.
Consolidating The Wrong Types Of Loans Prevents Certain Repayment Plans
The first big problem that can happen with student loan consolidation is that, since you can consolidate just about every type of Federal student loan, you can accidentally put a loan type in your new consolidate loan that prevents you from having certain repayment plans.
The most common problem involves PLUS Loans Made To Parents. If you're a parent, and you borrow with a PLUS loan to pay for your children's college, you should never consolidate these loans. This can be confusing, so let's break it down.
Parent PLUS loans are in the parent's name. You child can NEVER have this loan in their name. You can't transfer it to them, and you can't allow them to consolidate the PLUS loan into their loan.
However, if you're a parent with other student loans in your name, and now you have this PLUS loan, you could potentially add it to your other loans via consolidation. This is typically a bad idea because PLUS loans don't qualify for income-based repayment programs like IBR, PAYE, or RePAYE. As such, if you consolidate, you're at a loss of these programs.
This could also mean you won't qualify for student loan forgiveness programs such as PSLF.
So, never consolidate a Parent PLUS loan. Remember that.
Student Loan Consolidation Could Cost You More
Second, if you're not careful, consolidating your student loans could end up costing you more over the life of the loan. Immediately at consolidation, your new consolidation loan will be essentially equal to the sum of all your existing loans. Your interest rate will be the weighted average of all the loans you consolidated, and your payment should also equal the sum of all your individual payments.
Because remember, student loan consolidation is about convenience in paying multiple loans – nothing else.
Your new consolidation loan gives you choices in repayment plans – you could switch to an income-based repayment plan, or the extended plan.
If you switch to any other repayment plan, you will end up paying more over the life of the loan. However, that could be worthwhile if you simply can't afford your payment today and don't have a choice.
Getting Consolidation Confused With Refinancing
Finally, another trap borrowers can fall into is confusing student loan consolidation with student loan refinancing.
As we discussed earlier, student loan consolidation is simply the process of combining your Federal student loans into a new Consolidation loan.
Student loan refinancing is a little different. Refinancing is when you take out a new private loan, and use that money to pay off your other existing loans.
This can be confusing because there are a lot of student loan refinancing companies advertising this as an option to borrowers, and the Department of Education never advertises student loan consolidation. As such, this may be the only message you hear.
Student loan refinancing is typically not a good choice for Federal loans. We go into detail here about why student loan refinancing isn't a good idea when you have Federal student loans. However, if you have private student loans, refinance away and always try to find the lowest interest rate.
You Don't Have To Pay For Student Loan Consolidation
As a last reminder, you don't have to pay for student loan consolidation. There are a lot of student loan scams out there targeting people looking to consolidate their student loans. There are also a lot of so-called “aid” companies that want to charge you to consolidate your student loans.
The bottom line is that you can simply consolidate your student loan for free at StudentLoans.gov, or by simply calling your lender. Once you login to StudentLoans.gov, you can easily complete your student loan consolidation application. If you know your name, address, and Social Security number, you're capable to do this yourself without paying anyone else.
Now, if you don't want professional help (and you understand that you don't need to pay), we recommend Ameritech Financial, a company I’ve personally vetted. They can help you navigate the student loan terrain and help you systematically apply for the programs offered by the Department of Education. If you’re not sure about doing it yourself, then Ameritech can help you find the repayment solution that’s right for you, and potentially restructure your loans so that you can qualify for programs you may not otherwise have qualified for. You can call them at 1-866-863-3870 or check out their website here.
Student loan consolidation is a great tool for most student loan borrowers. It makes student loan repayment easier, and it's a free service.
Unless you fall into one of the situations above, the problems with student loan consolidation are minor.
We highly recommend student loan consolidation as a tool to begin to pay off your student loan debt.