If you have a lot of student loan debt, different servicers, or both, there’s a chance you could forget about at least one of them.
And that can be costly: Forgetting to pay a student loan can cause late payment fees to add up and your credit score to drop. This can hurt your chances of getting low-interest credit cards or loans in the future — all from neglecting a student loan payment.
If you’re trying to keep your payments under control, you might want to try to consolidate your student loans. Be mindful that consolidating isn’t for everyone, so make sure it makes sense for your situation first.
What is loan consolidation?
Consolidating your student loans takes all your loans and combines them into one. Instead of having many payments every month, you’ll only make one.
There are two types of consolidation: federal loan consolidation and student loan refinancing. Federal loan consolidation is only offered for federal loans through a Direct Consolidation Loan. Refinancing allows you to consolidate both federal and private student loans. Private lenders — like banks and online servicers — can refinance your loans.
If you choose federal consolidation, your new interest rate will be the weighted average of all your interest rates. With refinancing, however, you get a new interest rate. The new rate offered will vary, but is based on your credit history and score. The higher your credit score, the lower your interest rate. Unlike refinancing, federal loan consolidation doesn’t use your credit history to determine your new loan terms.
Pros and cons of federal student loan consolidation
If you’re trying to determine if you should consolidate your student loans, make sure you weigh the good along with the bad.
- No credit check: If you get a Federal Direct Consolidation loan from the federal government, it’s like taking out a new federal loan. Most federal student loans don’t require a credit check.
- Smaller payments: Consolidating your loans will change your repayment plan and expand your repayment term from the standard 10-year term to up to 30 years.
- Fixed interest rate: Variable rate loans mean your payments can change from one month to another. Fixed rates can give you the peace of mind of making the same payment every month.
- No lower payments: Since federal consolidation loans take the weighted average and round up to the nearest one-tenth percent, you’re not guaranteed to pay less every month than you were when you made multiple loan payments.
- Paying more over time: Stretching out your loan terms is great for low monthly payments, but it means you’ll pay more in interest and eventually over the life of the loan.
- Federal loans only: With federal consolidation, only your federal student loans can be combined. If you have private student loans, they don’t get included.
3 alternatives to student loan consolidation
If you’re in over your head with managing your student loan payments, consolidating might be a good idea. But there are other repayment options you should look into as you’re making your choice.
1. Try student loan refinancing
If you have a mix of federal and private loans or you know consolidating won’t lower your interest rate, refinancing might be your answer.
You can refinance your student loans with any lender you choose. But before you decide on one, make sure you do your homework and compare multiple lenders.
Also keep in mind that if you choose to refinance federal loans (like Direct Loans, Perkins loans, or Parent PLUS Loans) along with your private loans, you could lose some federal benefits such as an income-driven repayment loan program (like income-based repayment), public service loan forgiveness, deferment, and forbearance.
While refinancing doesn’t guarantee you a lower interest rate, you’ll still be able to see if you qualify for one compared to consolidation. If you have a good credit score, you might qualify for a low interest rate. If you don’t, you may want to consider getting a cosigner. Keep in mind that a cosigner becomes liable for your loan if you don’t make payments, which can affect their credit score.
2. Sign up for autopay
If refinancing or consolidation won’t work for you, you still have to stay on top of your current payments. But there is another way to lower your interest rate.
Many loan servicers allow you to set up automatic payments for your loan, with some offering an interest rate discount if you do (typically around 0.25%). Ask you servicer if they offer an autopay discount to save yourself some money.
3. Set calendar reminders
Remembering your mom’s birthday might be a struggle, so naturally remembering when your loan payments are due isn’t always on the top of your mind.
If you can’t set up autopay, setting a recurring monthly calendar reminder for you to pay your loans is the next best thing. Having a reminder every month will come in handy. You’ll get an alert when your payment is due and instead of worrying about being late, you’ll always pay on time.
You can also ask for a change in due date if you prefer to pay all your bills the same day each month.
Should you consolidate your student loans now?
If your student loan payments are causing you stress and financial woes, consolidation might be a good idea.
Just remember it’s not the only choice you have. Make sure you review all of your options to see if consolidation is right for you. And if it isn’t, make sure you utilize other ways to stay on top of your student loan payments.