If you’re like the average new college grad, you have $35,000 of student debt spread among eight to 12 different loans—also known as a massive weight tied around your neck.
Consolidating your loans won’t remove that weight. But it can simplify your repayment terms and, in some cases, lower your interest rates or monthly payments. That’s according to Mark Kantrowitz, a student loan repayment expert, bestselling author, and publisher of Cappex.com—a site that provides in-depth financial information and reviews on colleges and scholarships.
Here, Kantrowitz explains the ins and outs of consolidating your loans.
FEDERAL STUDENT LOAN CONSOLIDATION
If you’re a recent grad, chances are good you borrowed money directly from the Fed, as opposed to a private bank or lender. If that’s the case, Kantrowitz says you can consolidate your existing loans through the Department of Education’s student aid program at studentloans.gov.
“The big benefit here is simplification,” he says. Instead of having to juggle a dozen or more loan payments, you’ll have just one payment and one loan to worry about.
You may also qualify for some loan restructuring, or even loan forgiveness, if you work for the government or meet some other qualifications, he says.
All that’s good. Unfortunately, you won’t necessarily owe any less. “The new interest rate will be the weighted average of your previous loans,” he explains.
There are times when this kind of consolidation may not make sense for you, but more on that below.
PRIVATE LOAN CONSOLIDATION
If some or all of your student loans are through private banks or other non-Fed sources—something that’s likely if you borrowed for school prior to 2011—you probably don’t qualify for the Fed’s consolidation program, Kantrowitz says.
The good news: You may be able to score a lower interest rate when you consolidate through a private bank.
“Your new rate will be based on your current credit score,” he explains. So if you’ve been out of school for a while, have landed a good job, and have been diligently paying your bills and building solid credit, you may save money by consolidating, he adds.
Even if you qualify for the Fed’s consolidation program, the ability to secure a lower rate may make the private route your best option, he adds.
Just be careful: Private banks and loan consolidators may offer you a lower rate and lower monthly payments in exchange for extending the length of your loan repayment schedule by years, or even decades. “You may end up agreeing to pay much more over the life of your loan,” Kantrowitz warns.
To figure out if consolidating makes sense, you’ll have to speak with lenders and closely compare your current terms to their offers, he says. Kantrowitz has compiled a comprehensive list of private lenders here.
WHAT TO WATCH OUT FOR
If you’re considering the Fed’s loan consolidation program, check to see if all your existing loans have roughly the same interest rate. If one or two are much higher than the others, those will pull up the rate you secure when you consolidate.
“You may be better off targeting that high loan first, rather than rolling it into the weighted average,” Kantrowitz explains. That doesn’t mean you should neglect to pay your other loans. You just want to hit your minimums and work on paying off the loans with the highest rates, he says.
Also, if you have to go the non-Fed route and your credit stinks, you may only be able to consolidate if you accept a higher interest rate than you’re currently paying. The simplicity of one bill probably isn’t worth that higher interest rate, Kantrowitz says.
There’s more to loan consolidation—including the chance to cut ties with your parents or cosigners. But the above should be enough to get you started.
Whatever your situation, consolidation is worth checking out, Kantrowitz says.