Student Debt Consolidation

According to MonsterTrak’s Annual Entry-Level Job Outlook, almost half of the 2007 graduating class had $25,000+ in student loans when they left school. There's no way to sugar-coat it: that's a pretty harsh "welcome into the real world" moment, and it helps explains why more and more reason grads are opting to shack up with mom and dad so they can save up money and pay off their debts.

But it's not all doom and gloom, players—we're here to help you figure out if you can make the system work in your favor through student debt consolidation, one of the most popular choices for grads struggling to pay off their loans. At a very basic level, consolidation provides three major benefits: it combines all of your separate student loans into one streamlined loan, fixes the interest rate (by taking a weighted average of the current interest rate on each of your loans), and can stretch out the repayment schedule (thereby reducing your monthly payments).

Needless to say, there are some storm clouds surrounding the silver lining of student debt consolidation. Once you’re comfortable with our Student Debt Overview and Understanding Loans and Debt guides, use this article to understand all the pros, cons, and intricacies of consolidation. Be sure to utilize your grace period—the six-month period when your lenders give you a reprieve from paying back any debt—to figure out your best options based on what type of debt you have.

• Why should I consolidate my debt? (See below)
• How do I prepare my debt to be consolidated?
• How do I consolidate my debt?
• Can I use a private debt consolidator?

In this article, we will focus on federal loans and consolidating through the government, but the same general guidelines for consolidation still apply to all types of loans. You'll find further information on private loans at the end and in our article on Private Debt Consolidation and Debt Forgiveness. Note: Federal loans include Stafford loans, PLUS loans, and others. But chances are you got them originally through a private company (e.g., your bank or Sallie Mae). If so, they're still federal loans and you can consolidate directly through the government.

Ok, enough messing about. Let’s roll…

Why Should I Consolidate My Debt?

If you have the loot to repay all your debt now, or you only have one or two lenders to pay back, then consolidation may be unnecessary. But for many recent grads, there are three major benefits to this plan of action:

Combining all of your loans simplifies the whole process and minimizes the risk of late payments. If you took out a different loan each school year, or even a different group of loans each year, then you might be stuck with 11 different loans with 11 different monthly repayment dates and 11 different interest rates. It's easy to see how missing a payment on one of your loans isn't far-fetched. And when it comes to student loans, what's worse than missing a repayment? NOTHING. Not only does the interest rack up, but it can also demolish your credit. So by combining all of your loans into just one loan with one monthly repayment date and one interest rate, it sure will help you keep track of your debt and make sure to never miss a repayment.

You can lock in your interest rates. Once you’ve locked in your rate, they will never change again over the life of your debt repayment. (If rates drop further, however, you also won’t be able to take advantage of them.) Locking in rates may seem like a slightly conservative move to the Gordon Geckos of the world, but we think it’s a safe play unless you know with some certainty that interest rates are about to drop (e.g., the government announces that they’re about to drop rates on loans). Read more about locking in variable rates in our Understanding Debt guide, and find out if rates are poised to drop by hitting up Googs and the government's loan consolidation "what's new" page.

You can lower your monthly payments. This is, in our opinion, one of the best reasons to consolidate. But there’s got to be a catch, right? No doubt, son! In order to lower your monthly repayment, what a consolidator (e.g., the government) will do is extend the life of your repayment (e.g., from the original 10 years to 30 years), which will enable you to repay less each month (up to half as much!). But the additional interest that racks up over those extra years of repayment will actually result in your paying more to the consolidator overall (up to three times more!). Of course, you can still consolidate your loan utilizing your original repayment schedule (e.g., 10 years) in order to accrue the other benefits listed above.