What is Student Loan Consolidation?

Student loan consolidation is the act of combining all student loans into one larger loan. This allows the borrower to pay off their total debt on one payment plan. This works because the larger loan is used to pay off the balances of the smaller loans. The borrower still has to pay the same amount of debt, but may be able to reduce their monthly payment by having the life of the loan extended. Interest, on the other hand, is not likely to be lowered. In fact, if the life of the loan is extended, interest may only increase even as monthly payments decrease.

Student loan consolidation can have many benefits for borrowers. Students graduating with numerous loans often find it much more practical and simple to swap out multiple payment plans for one easy monthly payment. Consolidating loans also erases any history of deferments and forbearances, giving borrowers new opportunities to request special kinds of debt relief from lenders. Consolidating also gives a borrower the opportunity to switch to a more preferred lender. Monthly payments may also be reduced because consolidation allows the borrower the option to extend the life of a loan.

There are also potential cons to student loan consolidation. If borrowers opt to extend the life of a loan in order to reduce monthly payments, they're likely to increase the total amount they'll be paying a lender back—the longer the life of the loan, the more interest is accrued, and the more the borrower will ultimately pay out. Consolidating may also cancel out favorable loan benefits that the borrower had pre-consolidation, such as subsidized interest and grace periods. Another caveat is that a borrower typically can only request student loan consolidation one time, so even if the borrower is unhappy after consolidating, the loans likely cannot be rearranged a second time.

Borrowers should always consult an expert and weigh all the pros and cons before going through with student loan consolidation. Certain benefits, such as extending repayment plans, may actually be available for some borrowers without having to consolidate. It's important to keep in mind that laws surrounding what can and can't be done with student laws are constantly subject to change. For example, it used to be that newly married couples in the United States were able to consolidate each individual's student loans under one larger loan. This law, however, changed, as it was too difficult to untangle loans in the event of divorce. Consult a financial professional to keep abreast of current laws, and to assess whether student loan consolidation will work best for your specific needs.