Why You Shouldn’t Consolidate All Your Student Loans


Student loan consolidation is complicated. It is the process of combining several loans into one new consolidation loan.

Sounds simple enough – but it’s risky! Student loan consolidation is one of the main causes of borrower problems.

If you consolidate your loans incorrectly, you could lose access to student loan forgiveness programs, repayment programs, or even your past loan forgiveness history!

And here’s the kicker – for most student borrowers, consolidation isn’t even necessary. So before you increase your risk of mistakes, let’s see why most borrowers shouldn’t consolidate their student loans.

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Why Consolidation Isn’t Necessary for Most

When you graduate from college, you may have several different student loans. It’s not uncommon for borrowers to accept more than 5 different loans (think one for each year of study, or maybe a summer semester added).

However, most borrowers will find that all of their student loans are with one student loan servicer. If so, it’s easy to manage all your student loans on one dashboard and one monthly statement.

If your loans end up in multiple service companies, this may be more difficult to manage, but not impossible. You have to make multiple payments (to each lender), but by using an app to track your finances, you can still monitor all of your loans in one place.

If you’re able to manage your money efficiently – whether with one or multiple lenders – you don’t need to consolidate. In most cases, consolidation brings convenience, but adds potential risk.

Understand the difference between consolidation and refinancing

One of the main messages encouraging individuals to consolidate are the advertisements that abound by private companies offering to help you consolidate your student loans.

It is important to know a few things. First, the difference between consolidation and student loan refinancing:

  • Student Loan Consolidation: Combine Multiple Federal Student Loans into a New Consolidation Loan
  • Student loan refinance: combining multiple loans (which can be federal, private, or combined) into a new private student loan

If you consolidate your student loans properly, you can still potentially gain access to federal programs such as student loan forgiveness or income-based repayment plans.

If you refinance your student loans, you now have a private student loan that does not have access to these programs. However, the best places to refinance student loans usually offer lower interest rates that could save the qualified borrower money.

Second, for your federal loans, you never have to pay a third-party company to consolidate your loans. You can do this yourself by going online to StudentLoans.gov or by calling your lender. There are third-party companies that will perform this service for you, but they will charge you a fee to do so. You don’t have to, unless you want to. And if you go with a third-party company, make sure you know how to spot and avoid student loan scams.

When You Should Never Consolidate

There are two times when you should NEVER consolidate:

  1. If you have Parent PLUS loans and regular loans
  2. If you have already made payments for loan cancellation

If you consolidate a Parent PLUS loan with other student loans, you suddenly lose access to many income-driven repayment plans. This can be detrimental to your finances.

Also, if you’ve ever worked towards loan forgiveness (whether through civil service loan forgiveness or through your repayment plan), consolidating your student loans resets the clock. Remember that consolidation is getting a new loan to replace your old loans. So if you consolidate, the old loans are gone (along with their payment history).

If you are on the path to forgiveness, don’t consolidate unless you have to.

Who Should Consider Student Loan Consolidation

There are instances where student loan consolidation makes sense.

The first and most obvious situation is if you have old FFEL loans, are eligible for civil service loan forgiveness and need to get a qualifying loan. By consolidating your old FFEL loans, you can now benefit from the PSLF in the future.

However, only do this if you don’t expect your FFEL loans to be repaid within 10 years. Since PSLF is a 10-year program, if you reconsolidate, you’re just adding the time needed if you had repaid them earlier.

Second, if you can’t manage multiple loan managers and need to have your loans in one place (with one loan). This option is less common, but still possible. In this case, you can consolidate, but make sure you don’t do any of the big no-no’s listed above.

Final Thoughts

Student loan consolidation is riskier than most people think. If you’re considering consolidating your loans, make sure you understand what you’re doing and follow the proper steps to ensure everything is done correctly.

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