Pros and Cons of Consolidating Student Loans for 2025

by Alex Hillsberg , MA

Student Finance & Loan Expert

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With repayments recommencing in October, many federal borrowers deem their student loans paramount. This requires thinking of the best action to address a new monthly overhead. According to TransUnion, this could amount to approximately $500 monthly.

Through extensive research and talks with loan experts, we curated the top pros and cons of consolidating student loans in this article. We'll also explain how student loan consolidation works, distinguish it from refinancing, and discuss its qualifications, to name a few.

Key Things You Should Know About Consolidating Student Loans

• Student loan consolidation combines multiple loans into a single loan.
• Consolidating federal student loans doesn't lower the interest rate.
• Private student loans cannot be consolidated through federal programs.
• Refinancing combines federal and private student loans into a new private loan with one monthly payment.
• In a consolidated student loan, a new interest rate is set based on a weighted average of the interest rates on the primary loans.

Table of Contents

1. What are the pros and cons of consolidating student loans?
2. How does student loan consolidation work?
3. Can I consolidate private and federal student loans together?
4. What is the difference between refinancing and consolidating student loans?
5. How does student loan consolidation affect your interest rate?
6. How does consolidating student loans cyour credit score?
7. Does consolidating student loans extend the repayment term?
8. What are the alternatives to student loan consolidation for managing debt?
9. Can you lose loan forgiveness eligibility by consolidating?
10. How does student loan consolidation affect your long-term financial future?
11. Will consolidating student loans affect my opportunities for further education?
12. Who is eligible to consolidate student loans for 2025?
13. Does Consolidation Affect Military Education Benefits?
14. Do I Need a Cosigner for Consolidated Student Loans?
15. How can I obtain student loans without a cosigner?
16. Have recent policy changes impacted student loan consolidation?
17. How do you choose the right consolidation provider?
18. How do you apply for student loan consolidation?
19. What repayment plans are available after consolidation?
20. Does Student Loan Consolidation Have Tax Consequences?
21. What are the common pitfalls to avoid during consolidation?
22. Can You Consolidate Student Loans for Certificate Programs?
23. Other Things You Should Know About the Pros and Cons of Consolidating Student Loans

What are the pros and cons of consolidating student loans?

Consolidating student loans is one of the many ways to save for college as it can help simplify debt management and potentially lower monthly payments. However, your loan types, interest rates, and how long you've been paying can determine whether consolidation is a good or bad option for you. The first thing we'd advise you to do is look at the following pros and cons of consolidating student loans to make up your mind.

Pros of Consolidating Student Loans

• Simplified Payments: Consolidation combines multiple loans into one, minimizing the number of payments to monitor every month.
• Fixed Interest Rate: Consolidated loans typically have a fixed interest rate, providing predictability and stability in monthly payments.
• Lower Monthly Payments: Extending the repayment term through consolidation can lead to lower monthly payments.

Cons of Consolidating Student Loans

• Longer Repayment Period: Monthly payments may be reduced, but the extended repayment term means paying higher interest throughout the loan.
• Loss of Benefits: Some loan benefits, such as principal rebates, in consolidated loans.
• No Reduction in Interest Rate: Consolidating federal student loans doesn't lower the interest rate; it is a weighted average of the current rates.

The time you have to pay back your consolidated loan varies based on how much you owe. Check out this table for reference.

How does student loan consolidation work?

Student loan consolidation refers to federal loan consolidation, a US government program. It is a process that combines multiple federal student loans into a single loan with a single monthly payment. This strategy can simplify the repayment process and potentially offer more predictable payment terms. To make informed decisions about consolidating student loans, understand:

• Eligibility: To be eligible for federal student loan consolidation, borrowers must have federal student loans in good standing. Private student loans cannot be consolidated through federal programs.

• Application Process: The consolidation process begins with completing the FAFSA application form. Borrowers select the specific loans they want to combine and choose a repayment plan and loan servicer for the new consolidated loan.

• Interest Rate Calculation: The interest rate for the consolidated loan is determined by calculating a weighted average of the interest rates on the original loans, rounded up to the nearest one-eighth of a percent. This means the new rate reflects the interest rates of the original loans without significant changes.

• Repayment Terms: One potential benefit of consolidation is the option to extend the repayment term up to a maximum of 30 years. This can result in lower monthly payments. Note that extending the repayment term will typically increase the total amount of interest paid over the life of the loan.

• Loss of Benefits: While consolidation simplifies the repayment process, potential drawbacks must be considered. Some borrowers may lose certain benefits associated with their original loans.

• Single Monthly Payment: After successful consolidation, borrowers will make a single monthly payment to their chosen loan servicer. This simplifies the repayment process and can help borrowers avoid missed payments.

Can I consolidate private and federal student loans together?

Federal and private student loans cannot be consolidated through federal consolidation programs. Only federal student loans are eligible for this process. Private student loans are excluded.

The alternative option for borrowers with both federal and private student loans is refinancing. Refinancing involves combining both types of loans into a new private loan with a single monthly payment. This can simplify the repayment process, but weigh the potential benefits against the drawbacks.

One significant disadvantage of refinancing federal loans with a private lender is the loss of federal loan benefits. These include access to income-driven repayment plans and loan forgiveness programs, which can be crucial for borrowers struggling to manage their student loan debt. 

What is the difference between refinancing and consolidating student loans?

Refinancing and consolidating student loans are often confused due to their similarities. These two processes differ significantly regarding eligible loans, goals, and outcomes.

• Student loan consolidation is a process exclusive to federal student loans. It combines multiple federal loans into a single loan with one monthly payment. The primary goal is to simplify the repayment process by managing multiple loans through a single payment. While consolidation can extend the repayment term to lower monthly payments, the interest rate for the consolidated loan is a weighted average of the original loan rates. A key advantage of consolidation is that borrowers retain access to federal loan benefits such as income-driven repayment plans and loan forgiveness programs.

• Student loan refinancing is offered by private lenders and can combine federal and private student loans into a new private loan. The primary goal of refinancing is to secure a lower interest rate, potentially reducing overall interest costs and monthly payments. Refinancing federal loans with a private lender comes with a significant trade-off: the loss of federal loan benefits. This includes income-driven repayment plans and loan forgiveness programs. As a result, borrowers must carefully weigh the potential savings against the loss of federal protections when considering refinancing federal loans.

How does student loan consolidation affect your interest rate?

When you consolidate your student loans, a new interest rate is determined based on a weighted average of the interest rates on the original loans. This calculated rate is then rounded up to the nearest one-eighth of a percent.

Student loan consolidation doesn't typically result in a significantly lower interest rate. Instead, the new rate generally reflects the average interest rate across your existing loans. Consolidation simplifies repayment by combining multiple loans into one, but recognize that it usually won't lead to substantial savings on interest costs.

How does consolidating student loans affect your credit score?

Consolidating student loans can expedite debt repayment and aid financial management. This process might impact your credit score, so I'll help you examine the positive and negative effects of consolidating your student loans in this section.

• Credit Inquiry: The application process for loan consolidation commonly involves a hard inquiry on your credit report. This can temporarily lower your credit score by a few points but this impact is usually short-lived.

• Payment History: Consolidating multiple loans into one can simplify debt management, reducing the risk of missed or late payments. Consistent on-time payments on the consolidated loan can favorably influence your credit score.

• Credit Utilization: Credit utilization is the amount of credit you're using compared to your total available credit. Although consolidation doesn't directly change your total debt, it can affect how your credit utilization is calculated. Nonetheless, the impact is generally minimal.

• Credit History: Consolidating your loans might close existing accounts and open a new one, affecting the average age of your credit accounts. This can slightly impact your credit score, but the benefits of simplified payment management normally outweigh it.

Does consolidating student loans extend the repayment term?

Consolidating your student loans typically means extending your repayment term. When you consolidate, you can choose a new repayment period ranging from 10 to 30 years, depending on the total amount of your consolidated loan. Stretching out your payments can lower your monthly payment amount, but doing so will generally result in paying more interest overall.

What are the alternatives to student loan consolidation for managing debt?

While student loan consolidation can simplify repayment and extend payment terms, it may not always be the optimal choice, especially if it doesn’t align with your financial goals or compromises federal loan benefits. Borrowers exploring ways to manage student debt should also consider alternative strategies.

One option is enrolling in an income-driven repayment (IDR) plan. These plans adjust your monthly payment based on your income and family size, potentially lowering payments to as little as $0. While not all loans are immediately eligible, consolidating specific loan types can make them qualify for IDR plans without forfeiting other federal benefits.

Another alternative is working toward Public Service Loan Forgiveness (PSLF) if you qualify. Borrowers employed in public service roles can have their remaining loan balance forgiven after 120 qualifying payments. By maintaining federal loans instead of refinancing with private lenders, you preserve this eligibility.

If private loans are causing financial strain, refinancing them with a lower interest rate through private lenders might be advantageous. Unlike federal loan consolidation, refinancing a private loan could lead to reduced interest costs if you have strong credit. However, borrowers with limited credit options should explore resources for student loans when parents have bad credit, which offer valuable insights into navigating financial barriers.

Ultimately, combining these alternatives—adjusting repayment plans, refinancing private loans, or leveraging federal loan forgiveness programs—can provide a tailored approach to managing student loan debt without solely relying on consolidation. Evaluate these options based on your unique circumstances and long-term financial goals to make an informed decision.

Can you lose loan forgiveness eligibility by consolidating?

Consolidating your student loans can significantly affect your eligibility for loan forgiveness programs. If you're enrolled in a loan forgiveness program like Public Service Loan Forgiveness (PSLF), consolidating your federal loans may result in losing the qualifying payments you've already made. This means you'll have to start the loan forgiveness process again with the new consolidated loan. 

How does student loan consolidation affect your long-term financial future?

Consolidating your student loans resets your repayment schedule, which can simplify your finances while potentially increasing the total interest paid over time. It is important to analyze how the extended repayment period aligns with your broader financial goals, including investment potential and retirement planning. Evaluate the long-term cash flow impact, considering that lower monthly payments may free up resources for other opportunities or improvements in credit building. For borrowers anticipating further education or career advancement, comparing consolidation with alternative educational strategies—such as pursuing fast-track degrees—can be crucial in optimizing overall financial health.

Will consolidating student loans affect my opportunities for further education?

Consolidating student loans can streamline current repayment but may also influence factors like your credit profile and debt-to-income ratio—elements that lenders assess when financing additional education. If you plan to pursue advanced studies, for instance through online dual graduate degree programs, consider how your new consolidation structure aligns with potential future borrowing requirements. Evaluate these implications carefully within your broader financial planning to preserve access to favorable education loan options.

Who is eligible to consolidate student loans for 2025?

To be eligible for student loan consolidation for 2025, borrowers generally need to have federal student loans. These loans must be in good standing, meaning they are not in default. If a loan is in default, borrowers must arrange to bring it back into good standing before consolidating. Both Direct Loans and Federal Family Education Loans (FFEL) qualify for consolidation. Additionally, borrowers must have completed their education, left school, or dropped below half-time enrollment to be eligible.

Borrowers with higher educational attainment tend to accumulate higher balances in student loan debt, as seen in the figures below.

Does Consolidation Affect Military Education Benefits?

For service members and veterans, consolidation decisions warrant an evaluation of military education benefits and funding programs. Consolidation may alter eligibility for certain benefits by resetting repayment histories or affecting credit considerations tied to military aid. It is essential to consult your military education office or financial advisor to determine if consolidation aligns with the criteria for benefits like the GI Bill or tuition assistance programs. Additionally, assessing alternative financing options could safeguard established military benefits while addressing overall debt management. For a comprehensive review of options for service members, explore guidance from a military online school.

Do I Need a Cosigner for Consolidated Student Loans?

In federal student loan consolidation, a cosigner is generally not required; however, borrowers considering private refinancing or hybrid loan solutions may face situations where adding a cosigner helps secure more favorable interest terms. Evaluating your credit profile and repayment capacity is essential before involving another party. For additional guidance on securing alternative financial backing without compromising eligibility, see cosigner student loan.

How can I obtain student loans without a cosigner?

Borrowers lacking a guarantor can explore independent financing strategies by emphasizing a strong credit history, consistent income documentation, and clear educational outcomes. Lenders may assess your overall financial stability and repayment capacity to determine your eligibility without external backing. Research detailed methodologies and proven practices to secure funding, including expert tips available on obtaining a student loan no cosigner.

Have recent policy changes impacted student loan consolidation?

Recent regulatory updates can alter eligibility criteria, loan terms, and interest rate calculations for federal consolidation programs. Borrowers should verify current guidance on approved loan combinations, capitalization rules, and any adjustments in repayment term options by consulting official resources. Staying informed about policy modifications can help in aligning consolidation decisions with evolving federal standards and ensuring that repayment strategies remain optimal. Additionally, if you are considering expanding your educational opportunities post-consolidation, review options like the cheapest bachelor degree to leverage improved cash flow for further investment in your education.

How do you choose the right consolidation provider?

When evaluating consolidation options, verify that the provider’s offerings align with your specific financial goals and loan types. For federal consolidation, understand that the process is regulated and standardized, whereas private refinancing may introduce variable interest rates and additional fees. Scrutinize provider terms, including processing fees, customer support quality, and repayment flexibility. Cross-reference independent reviews and third-party ratings to assess service reliability and long-term benefits. For further insights on how educational opportunities can complement your financial strategy, consult the 6 month online course with high salary.

How do you apply for student loan consolidation?

You can only consolidate student loans through the process stated below. 

• Check Eligibility: Verify if your federal student loans qualify for consolidation and are in good standing.

• Gather Information: Collect necessary information about your existing loans, including loan servicer details and account numbers.

• Complete the Application: Visit the Federal Student Aid website and complete the Direct Consolidation Loan Application. Provide personal information, select the loans you want to consolidate and choose a repayment plan.

• Select a Loan Servicer: Choose a loan servicer to manage your new consolidated loan.

• Review and Submit: Carefully review your application for accuracy and submit it online.

• Continue Payments: Maintain payments on your existing loans until your consolidation is finalized and confirmed by your new loan servicer.

What repayment plans are available after consolidation?

Upon consolidating your federal student loans, you'll have a variety of repayment plan options to choose from. Each plan offers different payment structures and terms to accommodate diverse financial situations.

• Standard Repayment Plan: This plan features fixed monthly payments spread over 10 years.

• Graduated Repayment Plan: With this plan, your initial payments are lower and gradually increase every two years, with a maximum repayment term of 10 years.

• Extended Repayment Plan: This plan allows for fixed or graduated payments over a longer period of up to 25 years, provided your consolidated loan amount meets the eligibility criteria.

• Income-Driven Repayment (IDR) Plans: IDR plans base your monthly payment on your income and family size. There are several IDR options available, including Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). Some IDR plans may offer loan forgiveness after making qualifying payments for 20 to 25 years.

Does Student Loan Consolidation Have Tax Consequences?

Although federal student loan consolidation generally does not trigger immediate tax liability, certain aspects can indirectly affect your tax situation. For instance, if interest on the original loans was being deducted prior to consolidation, the change in interest calculations might alter your deductible amounts. Additionally, capitalization of unpaid interest during consolidation can increase the principal balance, which may have long-term implications when considering interest deductions and overall taxable income. It is advisable to consult with a tax professional to understand how consolidation fits within your broader financial and tax planning strategies, ensuring that any adjustments in interest allocation are fully accounted for. For insights on related educational financing and cost considerations, review the easiest bachelor degree to get.

What are the common pitfalls to avoid during consolidation?

When evaluating consolidation, borrowers sometimes overlook subtle factors that might undermine long-term financial goals. Misinterpreting how extending the repayment period increases total interest, failing to verify that all eligible benefits are maintained, and not scrutinizing lender terms are common missteps. It's crucial to perform a detailed cost-benefit analysis prior to consolidating to avoid resetting progress toward forgiveness programs or compromising future repayment flexibility. Additionally, professionals considering shifts into specialized fields should compare consolidation outcomes against alternative financing strategies, for instance, how much does it cost to become a veterinarian.

Can You Consolidate Student Loans for Certificate Programs?

Certificate programs have gained popularity due to their shorter duration, affordability, and targeted focus on skills needed for career advancement. However, financing these programs often raises questions about student loan eligibility and the possibility of consolidating loans associated with such programs.

Federal student loans can be used for eligible certificate programs offered by accredited institutions. These include programs at community colleges, vocational schools, and some four-year universities. Private lenders may also provide loans for certificate programs, but the eligibility criteria and terms often differ from those for traditional degree programs. For a detailed guide on this topic, explore our article on can you get student loans for certificate programs.

Other Things You Should Know About the Pros and Cons of Consolidating Student Loans

How long does it take to consolidate private student loans?

Consolidating private student loans typically takes between two to four weeks, depending on the lender and the complexity of the borrower's financial situation. The process begins with submitting an application, which includes providing the necessary financial documents and loan details. Once the application is reviewed and approved, the lender will pay off the existing loans and issue a new consolidated loan. During this period, borrowers may need to continue making payments on their existing loans until the consolidation is complete. Factors such as the lender’s efficiency, the borrower's creditworthiness, and the completeness of the application can influence the overall timeline.

How many times can I consolidate my student loans?

You can consolidate your student loans multiple times, but there are specific conditions under which this can be done. You can also consolidate federal student loans initially. However, you may reconsolidate if you include new eligible federal loans that were not part of the original consolidation. Additionally, reconsolidation can occur if you seek to take advantage of a new repayment plan or get out of default. Private student loans can also be refinanced multiple times through private lenders, allowing you to seek better terms or interest rates as your financial situation changes. 

Can you cancel the loan consolidation?

Yes. You can cancel loan consolidation, but it must be done within a specific timeframe. Once you submit your consolidation application, you have until the new Direct Consolidation Loan is disbursed to cancel it. Contact the loan servicer managing your consolidation application and formally request to cancel it. After the loan has been disbursed, the consolidation cannot be undone, and you will be responsible for repaying the new consolidated loan. It is crucial to act promptly if you decide to cancel, as any delay may result in the completion of the consolidation process.

How does student loan consolidation provide financial stability?

Student loan consolidation provides financial stability by simplifying the repayment process and potentially lowering monthly payments. By merging multiple loans into a single loan with one monthly payment, borrowers can more easily manage their debt and avoid missing payments, positively impacting their credit score. Extending the repayment term can also reduce the amount due each month, making it easier to budget and meet other financial obligations. The predictability of a fixed interest rate on the consolidated loan further aids financial planning, providing a clearer understanding of their long-term financial commitments. Overall, consolidation helps streamline debt management and provides a more structured and manageable repayment plan.

References:

• Federal Student Aid. (n.d.). 5 Things to Know Before Consolidating Federal Student Loans. Retrieved August 2, 2024, from Federal Student Aid.
• Johnson, H. (2024, August 1). Should You Consolidate Your Student Loans? Retrieved August 2, 2024, from Investopedia.
• Student Loan Borrower Assistance. (n.d.). Consolidating Loans. Retrieved August 2, 2024, from Student Loan Borrower Assistance.
• TransUnion. (2023, July 19). With 27 Million Set to Resume Payments, Many Student Loan Borrowers Already Managing Increased Debt Since Pre-Pandemic. Retrieved August 2, 2024, from TransUnion.