Should I consolidate my student loans?

The complicated world of student loans can be an intimidating system to navigate for students and recent graduates. This article will provide information about consolidating student loans - the pros, cons, and how it works.

At Bold.org we want students to feel prepared and informed about the cost of their education, and after reading this article you will be able to make an educated decision about whether or not you should consolidate your student loans.

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What is student loan consolidation?

Student loan consolidation refers to two different processes: federal and private.

Federal student loan consolidation is the process of consolidating federal student loans into a single federal student loan. This process is done through the US Department of Education. Private student loan consolidation, also known as student loan refinancing, is the process of consolidating private student loans and/or federal student loans into one private loan. This process is done through a private lender.

Federal student loans can be consolidated into one federal loan. This simplifies the work you have to do to pay back your federal loans by making it so you only have to make one monthly payment to a federal direct consolidation loan. You can also access federal loan protections, repayment plans, and forgiveness programs if you consolidate federal student loans.

Refinancing private student loans also allows for a single monthly payment. However, refinancing has different benefits than federal loan consolidation. Refinancing can lower your rates, thus saving you money in the long term.

There are pros and cons to each of these methods when it comes to consolidating student loans. Generally, the benefit of both is that lowered monthly payments make it easier for individuals to Read on for more information about both options.

What are the disadvantages of consolidating student loans?

Student loan consolidation has both upsides and downsides, and there are different benefits and disadvantages depending on whether you choose to consolidate and refinance private student loans or consolidate federal student loans.

Consolidating federal loans does not lower your rates. It may lower your monthly payment because your loan term becomes greater, but your interest rate may increase. Further, this option is only for federal loans and will not affect your other student loans.

The disadvantages of getting a consolidation loan through a private lender are different than getting a federal direct consolidation loan. You can consolidate private loans, federal loans, or a combination of both through a private lender. However, if you consolidate your federal loans through a private lender you will lose access to federal loan protections, repayment plans, and public student loan forgiveness. Additionally, you need to already have an excellent credit report to get a direct consolidation loan for private loans.

Can my student loans be forgiven if I consolidate?

Only federal loans are eligible for student loan forgiveness, and as such, only a direct consolidation loan of federal student loans is eligible for student loan forgiveness. If you choose to refinance your federal student loans into a private direct consolidation loan you will no longer be eligible for student loan forgiveness.

Does it hurt credit to consolidate student loans?

Consolidating your student loans has the potential to either help or hurt your credit score. This section will detail both scenarios and explain why these changes can happen.

There is a potential for taking out a direct consolidation loan to improve your credit score. Because of the potential to lower monthly payments, students find it easier to pay their loan bills on time, and with a lower payment, their debt-to-income ratio is lowered as well. This may result in a boost to your credit score.

However, there is also a potential for consolidating student loans to hurt your credit. The good news is that this drop will likely be temporary. The process of taking out a new loan can cause a temporary drop in your credit score, but usually, your credit score will recover from this drop within a few months.

Frequently asked questions about consolidating student loans

What is the current interest rate for federal student loan consolidation?

In the 2022-2023 school year, the interest rate for undergraduate students' unconsolidated federal student loans is 4.99%. Current loans that are private can have interest rates that range from 2% to 14%, the exact number is determined on a case-by-case basis primarily based on your credit score.

Once consolidated, your federal direct consolidation loan will have a fixed interest rate. This number will be based on the weighted average of the interest rates of the federal loans being consolidated, rounded up to the nearest one-eighth of one percent.

Recently the interest rate for all direct consolidation loans was 0% between March 2020 and December 31, 2022, due to the CARES act. However, with the CARES act expiring at the end of 2022, fixed interest rates will resume.

Will student loan interest rates go up in 2023?

Yes, interest rates have gone up for the 2022-2023 school year. Each year in May the US Congress decides the year's interest rates. However, remember that your current loans and previous loans aren't affected by these changes. The new interest rates announced each year only pertain to loans taken out in that year.

Currently, for undergraduate students, the fixed interest rate for student loans is 4.99%. For graduate or professional students, the fixed interest rate for loans is 6.54%. And for parents and graduate or professional students, the fixed interest rate on Direct PLUS loans is 7.54%.

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