The aggravation of repaying student loans is one of the great (or abysmal) shared experiences of American college graduates. It’s bad enough to set aside that money every month, but the frustration grows as you’re sending payments to five different loan providers each month, to only make a small dent in the thousands of dollars you owe.
More than 43.3 million Americans are dividing the tab for $1.26 trillion in student debt — figures that continue to climb as tuition hikes each year. At some point — typically soon after graduation — each of those borrowers will at least consider whether they should consolidate their loans. “Consolidation” and “refinancing” basically mean the same thing, and the end goals are typically similar: Combine your loans in order to eventually owe less money, or combine them and use the opportunity to change your repayment options.
Of all the borrowers in the nation, roughly 28% (or 12 million people) have consolidated their loans in some way. Consolidation works in a similar manner across the board, but each situation is unique. Unfortunately, there’s not a one-size-fits-all solution to loan repayment. Refinancing might be great for some people, but somewhat a waste of time for others. To get an idea of how to make a wise decision with your loans, we spoke with Andrew Josuweit, the CEO of Student Loan Hero, for some best practices and advice.
Who makes a good candidate for loan consolidation?
There are basically two camps of people who seriously consider loan consolidation, Josuweit said in a phone interview. One camp is filled with people who are looking to save money by refinancing their loans at a lower interest rate. The other group is trying to extend the length of their repayment period, often from an average of 10 years to 15 or 20.
The people who make the best candidates for saving money on interest are those who started with loans that already had high interest rates. Grad students with grad plus loans, parents with parent plus loans, and any students with private loans are likely in this group, Josuweit said. Graduate and parent loans can run as high as 7-9% interest on each loan. (As a benchmark, the average interest rate for student loans is about 5.5 or 6%.) Depending on the private loan terms, interest rates can be just as high.
When considering refinancing, your personal preferences will need to guide whether you consolidate those high-interest loans. “I think it really depends on your financial goals and your financial situation,” Josuweit said. If you want to pay back the loans as aggressively as possible and have the means to do so in 5 years or less, almost any loan with a lower interest rate can help you reach those goals. Student Loan Hero generally advises against taking out a new loan with a variable interest rate, since those rates are influenced by market factors and could rise significantly. However, if you’re planning to pay back the loans in 2,3, or 5 years, a variable rate can save you more with a lower risk value than if it were a 10-year loan.
On the flip side, there are other borrowers hoping to extend the terms of their loans from the standard 10 years to a longer repayment period. This normally comes into play if you’re having significant trouble making ends meet, and need your monthly payments to be lower. You’re almost guaranteed to end up paying more overall with more interest payments, but if you need to do so to afford rent and basic necessities, it’s an option to look into.
Other reasons to consolidate student loans
Most people choose to consolidate their loans because of the reasons mentioned previously. But others have more niche reasons for considering it, Josuweit said. Some people might refinance student loans in order to remove a co-signer from the original loan. A co-signer’s credit score can be affected when they agree to cover a loan if the primary lender can’t make the payments.
In a perfect world this would only be a formality for the nervous bankers, but in reality creditors know that a co-signer could be on the hook for those payments. As a result, their own lending ability can be affected down the road. When a loan is consolidated, that co-signer can be removed, thus helping to restore their credit score.
Another reason Josuweit mentioned is that a lender might be tired of dealing with their current loan servicers. Traditional lenders can be difficult to work with, and customer service can be sluggish at best. Newer online-based lenders like SoFi and Earnest often have fewer regulatory boxes to check off, and as a result can often offer faster and better service, Josuweit said he’s discovered. “The user experience and customer experience, in my opinion, is typically a lot better than traditional banks,” he said.
Cautions for consolidating loans
The idea of having one monthly payment for all your loans — at a lower interest rate no less — is probably sounding like a convenient option. But it’s not for everyone, and there are some disadvantages to keep in mind as well. First off, there’s no “undo” button after consolidating. Once the loans become lumped into one, there’s no going back and making them separate payments again. With that in mind, it’s definitely worth it to use a consolidation calculator (like the one at Student Loan Hero) to estimate what your savings will be.
It’s also important to keep in mind that if you consolidate federal loans with a new private loan, you immediately lose out on any federal assistance programs. You won’t be eligible for any pay-as-you-earn programs, and you’ll also lose out on the Public Service Loan Forgiveness option.
Ultimately, consolidation is primarily an economic decision, Josuweit said. “If you’re not going to save a tremendous amount of money, I don’t really see why you would do it, to be honest,” he said. “You just have to do the math and make sure it makes financial sense.”
Alternatives to consolidation
If you’re not sure consolidation is a smart choice for you, there are several other ways to make repayments easier — and potentially still save some money on interest payments.
If your payments are affordable and your interest rates are relatively low, consolidation would only make sense for the convenience of having one payment. Instead of going through the headache, U.S. News & World Report suggests taking some time to set up automatic payments instead. You’ll still be making those multiple payments each month, but they’ll come straight from your bank account without you having to think about it each month.
In terms of federal loans, the government offers a Complete Federal Direct Consolidation Loan Application. This is only relevant for multiple federal loans, but would consolidate them into one payment. Most people who apply are accepted, Josuweit said, and the program is completely free of charge to the applicants.
If you’re planning to pay down your debt as fast as possible, another option is to simply make extra payments on your federal loans. When you do so, you can target which loans you want to pay off first. Choosing the ones with the highest interest rates first will decrease the amount of money you owe in interest — and likely also bring down your overall monthly bill, too.
And finally, keep in mind that you can cherry-pick certain loans to consolidate. Josuweit said consolidating the high-interest loans (like grad plus loans or private ones) into one lump sum can bring down that interest rate, while leaving your lower-interest loans as-is. This will diversify your risk a bit, but also bring down the overall number of payments you make.