Student Loan Consolidation – When is it a good idea?

Advertisements for help with student loan debt are everywhere I turn.  My eighty-one year-old grandfather got a call recently offering help with his student loan debt.  He graduated from college over fifty years ago! Of the advertising, consolidation offers seem to stand out as the most legitimate and attractive ones.  Who doesn’t love the chance to lower the interest rate on a loan and save money!  Clients often ask us whether consolidating student loans is the right move.

Here are some things to think about if you’re considering a student loan consolidation.  If you have federal student loans, you have the option of a federal loan consolidation or a private consolidation.  A federal consolidation can be advantageous when you have several different servicers.  Keeping up with communication and making payments to different places gets complicated and can increase the possibility of a missed payment. The new interest rate will be a weighted average of previous interest rates, so the total interest you pay will stay the same.

If you are pursuing Public Service Loan Forgiveness, consolidation of federal loans is probably not a good idea.  A consolidation restarts the clock on the 120 monthly payments required before forgiveness.

A private loan consolidation for current federal student loans is another option. These are the products you’ve likely seen in advertisements.  I’ve seen extremely low rates advertised lately in the two percent range! Keep in mind, when a student loan is no longer federal, you lose benefits like the options to defer or forbear payments if you have a financial hardship, as well as the option of income-driven repayment plans.  If you are in a place financially where you feel comfortable with your student loan payments without any need for an income-driven plan, then this is a good time to compare available interest rates to your current rates.  The rates offered will be based on your credit score.  Your existing loans may have a range of different interest rates.  Review all of your loans individually to find out each interest rate, and then consolidate only the loans that have a higher rate than the one being offered by your new potential lender. Leave the lower interest rate loans where they are.

If you’re considering a consolidation of private student loans, then most likely there aren’t many, if any, perks that you would be giving up by consolidating. Usually existing loans have a higher interest rate than what’s currently available because students as a general rule don’t have great debt-to-income ratios or long credit histories, making them riskier borrowers and leading to the lender charging a higher rate.  In some cases, the loans might have required a co-signer.  If either of these applies to you, a private student loan consolidation can likely lower your interest rate and potentially remove your co-signer.

If you decide to investigate a private student loan consolidation, keep a few things in mind.  The first rule of looking for any type of loan is to shop around and compare offers. Some websites, like, can take your information and compare rates for you based on what’s available.  The initial search is only a soft inquiry on your credit, meaning it won’t affect your score if you don’t move forward with the consolidation. Things to look out for as you compare offers include whether the interest rate is fixed or variable. That two percent interest rate offer I mentioned earlier will almost certainly turn out to be a variable rate loan, which might end up costing you more in the long run when rates change in the future. Are there any additional fees involved in the new loan? Will the term be longer or shorter than your existing loan and how will that affect the total amount of interest paid?

Student loan debt affects your financial plan and ability to save for future financial goals. Don’t jump on an offer that may be too good to be true. Instead, determine if consolidation is a tool that would work for you to save on interest paid over time.

-Kathryn Beach


Any opinions are those of Kathryn Beach and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notices.