Federal Student Loan Consolidation

Pros and cons of consolidating U.S. government loans

If you're a U.S. college student who is approaching graduation day or a recent college graduate, no doubt you've been contacted by student loan consolidation services. As you wade through all this information, it can be hard to get a straight answer to a simple question: is federal loan consolidation right for you?

First of, what is student loan consolidation? This simply means that if you took out more than one U.S. government loan during your time as a college student, you can combine all of them into one.

If you also owe private student loans that weren't part of your financial aid package, you can consolidate these as well. However, lenders recommend that you don't consolidate federal student loans and private student loans together. If you do this, the new consolidated loan will count as a private loan, and you will lose all the benefits that come with your federal student loans, such as student loan deferment if you go to graduate school.

So what are the advantages and disadvantages of consolidating your federal student loans? This questions depends partly on how much you owe, how much you've already paid, and other personal financial variables. In a nutshell, here's the pros and cons:

ADVANTAGES TO GOVERNMENT STUDENT LOAN CONSOLIDATION

• By consolidating your loans, you will likely have a lower monthly payment. The federal interest rate is likely to be lower than the combined interest of your original loans. When you consolidate, you also have the opportunity to pay the loans back over an extended period of time, which will result in lower monthly payments.
• Borrowers can choose from four different payment plans, including an extended payment plan that can extend up to 30 years, depending on the amount that is owed.
• If you consolidate your loans, you only have to make one convenient monthly payment.
• There's no fee for consolidating your government student loans.
• There's no credit check when you consolidate your government student loans.
• There's no penalty for paying the loan off early.
• The loan application process is much simpler than it is for other kinds of loans.

DISADVANTAGES TO GOVERNMENT STUDENT LOAN CONSOLIDATION

• If you take an extended payment plan, you will you pay more interest in the long run. If your loan is large, this could cost you thousands of dollars and have a negative impact on your financial future.
• It's possible that the consolidated student loan rate will be higher than the interest rates on your other loans. If this is the case, consolidation is not to your advantage.
• If you consolidate your loans during the six month grace period after graduation, you lose the remainder of the grace period.
• If you've already paid off a large chunk of your student loans, consolidation may not be worth the money or effort.
• Borrowers with a Perkins loan forfeit the special benefits that come with this kind of loan if they consolidate.

© Naomi Rockler-Gladen