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Should I Consolidate My Student Loans?

It’s the day you’ve been waiting for. You walk across a stage, graduation cap and gown in place, your family bursting with pride in the audience. Someone hands you your hard-earned diploma, and there’s applause and a celebration.

But then another piece of paper arrives, maybe before you’ve even had time to frame your degree. Only this time there is definitely no applause or celebration. Yep, that’s right. It’s your student loans calling, and somebody wants their money back.

If your college dream has turned into a post-graduation nightmare, you’re not alone. The latest numbers show student loan debt is now topping out at just over $1.7 trillion.1 Yes, that’s t as in trillion. And the average student loan debt is hovering around $39,000.2

While there’s no get-out-of-debt-free card to eliminate your student loans, student loan consolidation may be a way to get at least a couple of monkeys off your back. But is it the right choice for you and your situation? Let’s dive into the details and see.

What Is Student Loan Consolidation?

The goal with student loan consolidation is simple: to roll all your different student loan payments into one lump payment. Ideally, this will get you a lower interest rate and shorter term.

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Technically speaking, the only student loans that can be “consolidated” are federal student loans. Everything else—so, private plus federal or private only—has to be refinanced. We’ll get to that in just a minute.

Here’s the deal: Student loan consolidation is the only form of consolidation Dave Ramsey recommends—but on a case-by-case basis. It isn’t right for everyone. (In case consolidation’s not for you, there are several other types of student loan relief that might be able to help you.)

Before you consolidate your federal student loans, there are two really important things you need to know.

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1. You can only consolidate your federal student loans once . . . so make it count.

You pretty much just get one shot at federal student loan debt consolidation, so you need to have all your ducks in a row. Before you go through with the process, make sure you’re up to speed with how many loans you have and what their rates and terms are. You can’t consolidate private student loans, and we’ll walk through that below.

In some cases, you may be able to consolidate your federal loans again. But it’s usually not a good scenario if that’s happening. It will mean one or more of the following is true: you have new loans that weren’t in the first batch, you’re in default on your Federal Family Education Loan (FFEL), or you’ve signed up for the public service loan forgiveness program. Yikes—bad, very bad and no thanks.

Sure, loan forgiveness sounds great. But when you consider all that’s required and how few people actually end up with their loans forgiven, you’re probably better off skipping that pain in the neck.

A word to the wise, if you’ve got grad school or another degree on your mind, don’t take out loans to pursue it! Not only is going into more debt a terrible idea, but if you do, don’t bet on being able to fold that loan into your consolidation.

2. You can’t lower your interest rate when you consolidate federal student loans.

The benefit to consolidating your federal loans is that you go from having two or more loans to just one. You also can take any variable rates and turn them into one fixed rate. And that can definitely make life—and budgeting—a whole lot simpler. But don’t look to federal student loan consolidation to provide your winning ticket to a lower interest rate. What happens most often with federal student loan consolidation is that, yes, you get a lower monthly payment, but it’s because you’ve extended the length of the loan. You’re paying less each month but for longer, so you don’t save money.

Which Types of Student Loans Can Be Consolidated?

Before you skip off to your local bank (or start searching for loan consolidation companies), you need to know what kind of loans you have and if they’re eligible for consolidation. Spoiler alert: Only your federal loans can be consolidated for free through the government. That means no private loans allowed.

Federal Student Loans

If you’ve got a handful of federal student loans, you might be eligible for student loan consolidation for free through a U.S. Department of Education service. A Direct Consolidation Loan allows you to roll all of your federal loans into one payment under a new fixed interest rate (based on a weighted average of your current interest rates and rounded up to the nearest one-eighth of one percent).3

A benefit of a Direct Consolidation Loan is the fixed interest rate. With a fixed rate, you can lock in those monthly payments into your budget and start attacking them with a vengeance.

But take note: There’s no cap on the interest rate on a Direct Consolidation Loan. So if you’re paying high interest rates on your loans now, you’ll likely still be paying a high rate after consolidation. And securing a lower monthly payment could also mean you’ll be paying on your loan for longer—even up to a term of 30 years. Talk about a nightmare.

Private Student Loans

If you’ve got private loans, you can’t consolidate them with a federal Direct Consolidation Loan. But some lenders or banks will allow you to combine your private loans into one lump sum under one interest rate. Because your rate is often determined by your credit score, a less-than-stellar score could mean you’re in for a bumpy ride. Not only that, but their interest rates are also usually higher than a direct consolidation of your federal loans. Double ouch.

There is a silver lining though. If you’re getting slammed by loans with variable interest rates, talk to your lender about combining your loans under one new fixed interest rate.

Private and Federal Student Loans

If you’re like most graduating students, you probably have a mix of both private loans and federal loans. If that’s the case, you’ve probably found out how hard it is to consolidate these types of loans together into one happily blended family. If you’re looking to roll private loans or a mix of federal and private loans into one, you’ll have to go through a private lender under a process called refinancing.

Student Loan Consolidation vs. Refinancing: What’s the Difference?

Tomato, to-mah-toe, right? Wrong. Student loan consolidation and student loan refinancing are two completely different things. Consolidation takes the weighted average of your interest rates on your loans and rolls them into one.

With refinancing, you’re taking your private loans (or a mixture of both federal and private loans) and essentially starting back at square one. You’ll need a private lender or company to do this for you.

So if your rates and payment terms are killing you, refinancing your student loans might be a good option for you. Once you find a lender, they’ll pay off your current loans and become your new lender. The goal is to end up with a better interest rate and repayment terms.

Remember: Don’t be so desperate for a lower monthly payment that you sign up for a longer repayment period or one with a higher interest rate. You’ll end up paying even more in the long run. Who wants to do that?

And never—never—agree to a variable interest rate. Why? Because variable interest rates change based on market rates. There is zero guarantee that the great low rate you locked in for your first few payments won’t skyrocket six months down the line. Do yourself a favor and steer clear!

Should I Consolidate My Student Loans?

If you’re drowning in monthly student loan payments and considering student loan consolidation, listen closely:

When you lower your monthly payments through consolidation, you’re also lengthening the amount of time it’ll take you to pay the loan back (if you’re making minimum payments). And as you know, the more payments you make over time, the more money you’re paying in the long run.

You should only consolidate your student loans if:

  • It won’t cost you anything to consolidate them.
  • You can get a fixed interest rate instead of a variable rate.
  • Your new net interest rate is lower than your current net interest rate.
  • You don’t sign up for a longer repayment period.
  • You don’t get so relieved by the thought of a single payment that you lose your motivation to pay off your debt fast!

If you’re going to consolidate, you can’t take your foot off the gas. Not even for a minute. Get laser focused, get on a budget, and pay off your student loans as fast as you can. Use the Student Loan Payoff Calculator to calculate how quickly you can pay off your loans by making extra payments.

No matter what you believed when you took out your loans, now it’s time to get serious about getting rid of them. Kickstart your journey to dumping student loan debt for good with Anthony ONeal’s new 64-page Quick Read, Destroy Your Student Loan Debt. Anthony’s step-by-step plan teaches you how to budget, create an emergency fund, and accelerate your debt snowball to pay off student loans faster.

Guide to Getting Rid of Your Student Loans

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Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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