Consolidating Student Debt

Regardless of whether you just graduated from college or are a few years removed, if you’re one of millions of Americans dealing with student debt, you know how complicated managing payments can be, especially if you have multiple loans with just as many lenders. Depending on the type of loans you have, consolidating them might make sense, as this would reduce the number of payments you would need to make, and it might even save you money in the long run by allowing you to obtain a lower interest rate. However in some cases, especially with federal loans, you may lose access to special payment plans by consolidating, so it’s always a good idea to know your options before making any irreversible decision.

Let’s start with how to determine what loans you have. Anyone can easily determine their Federal loan information by accessing the National Student Loan Data System (NSLDS). After creating an account and logging in, you can see all Federal loans you currently own as well as the loan details such as the most recent balance and interest rate. Any other loans that are listed on your credit report, but not on the NSLDS website, will be private loans.

After determining what loans you currently manage, it’s time to decide whether you would actually benefit from consolidation. Combining Federal loans through the Federal Direct Consolidation program can certainly provide the relief of cutting your payments down to one, but if the rates of your individual student loans are different, this might not be the most frugal move. This is because the rate of the new consolidated Federal loan is the weighted average of all the loans combined, which means you would lose the ability to pay off the highest interest rate loan first – saving you interest in the long run. Consolidating the loans might also extend the repayment period, lowering your payments but also increasing the total interest you pay over time.

If you have a mix of Federal and private loans, refinancing into a single private loan seems like a good idea especially for those who wish to obtain a better rate, but be warned, doing so bars you from taking advantage of flexible Federal payment plans which are only available to Federal loans, including the generous  Public Student Loan Forgiveness program, which we talked about in depth in our first quarter newsletter last year.  

No matter what types of loans you may possess, please feel free to contact us about how to consolidate them to ultimately reduce headaches and stress while ensuring you are taking advantage of the most favorable loan terms available.

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     - Adam Powers, CFP®