Student Loan Consolidation – Pros and Cons

  • May 3, 2017
  • By: Greenpath Financial Wellness

If you have multiple student loans, you may want to consolidate them at some point.  Consolidating basically means taking out a brand new larger loan to pay off all of your smaller loans.  Let’s consider some arguments in favor of student loan consolidation and some arguments against student loan consolidation.

What is Student Loan Consolidation?

Student loan consolidation is the process of taking out a new, larger loan to pay off all your current, smaller student loans. This larger loan will have one interest rate and monthly payment, and may include new repayment options.

What Types of Student Loans Can Be Consolidated?

How you consolidate student loans depends on the type of loans you have:

Federal Student Loan Consolidation

According to the Department of Education, multiple federal loans can be consolidated through the Department of Education’s Direct Consolidation Loan. The Direct Consolidation Loan has a fixed interest rate and multiple repayment plan options.

Most federal loans are eligible for consolidation, including Subsidized Federal Stafford Loans, Unsubsidized and Nonsubsidized Federal Stafford Loans, Federal Perkins Loans, Direct Subsidized Loans,  and Direct Unsubsidized Loans. 

Federal student loans can not be consolidated with loans from private lenders.

For more information, check out the Department of Education’s website on student loan consolidation.  The site answers a lot of frequently asked questions and enables you to go through the entire consolidation process online. 

Private Student Loan Consolidation

Private student loans can be consolidated into a single loan through certain education lenders. According to, “interest rates on private loans are based on your credit score,” so if your credit score has improved since you took out the loan — typically 50 to 100 points or more — you may be able to get a lower interest rate by consolidating. 

Keep in mind that your interest rates for private loans will likely be higher than the interest rate on federal loans, even after consolidating.

Student Loan Consolidation – Pros

  • Consolidating your student loans makes life simpler.  Depending on when you went to school and what types of loans you took out, you may have to juggle multiple payments each month.  Consolidating ensures that you only have to worry about one student loan payment each month.  Keep in mind that private student loans cannot be consolidated with federal loans.
  • Student loan consolidation could help protect your credit report.  Let’s pretend you have taken out eight subsidized loans and eight unsubsidized loans—one for each semester.  Before you consolidate, you may still only get one bill and make one payment to your lender.  But, as far as your credit report is concerned, each loan is listed as a separate debt.  So, if you miss “one payment,” this may actually show on your credit report as 16 missed payments!
  • If you have Stafford loans that were taken out prior to July 2006, your loans probably have a variable rate.  Consolidating those loans would lock in a fixed interest rate and help protect against future interest rate increases.
  • If you consolidate your loans, you may have student loan repayment options that would enable you to stretch out your payments over a longer period of time. This could allow you to make smaller payments.

Sounds like a slam dunk, right?  Not so fast.  Let’s also consider the cons of student loan consolidation.

Student Loan Consolidation – Cons

  • The new interest rate will be a weighted average of the loans being consolidated, rounded up to the nearest one-eighth of a percentage point.  So, you may end up paying a slightly higher rate. Keep in mind that private lenders set their own interest rates.
  • If all of your Stafford loans were taken out after July 2006, you already have fixed-rate loans.  Thus, there would be no reason to protect against future interest rate increases.
  • When certain loans are consolidated, you may lose eligibility for some of the forgiveness programs.  For example, federal Perkins loans offer loan cancellation for certain teaching positions.  If an eligible loan is paid off through a consolidation, eligibility may be lost.  You do have the option of leaving some loans out of the consolidation.
  • If you have a Parent PLUS loan, including it in the consolidation will make all the loans ineligible for Income-Based Repayment.


Chelsee Spencer has been with GreenPath since 2013. As part of her role as a Financial Wellness Expert, Chelsee also provides Student Loan Counseling services to borrowers. Her desire to help people is sincere and investing her time towards our clients financial goals is something she finds fulfilling. Chelsee resides in the metro Detroit area with her husband and four kids.