Consolidation of student loans: a solution for those who are in debt


American college graduates, and others who have taken out student loans, are saddled with record debt.

According to the Federal Reserve, American consumers – 44 million borrowers in total – owed $1.4 trillion in student loan debt in 2017. That’s a staggering total, especially considering that figure is $620 billion more than all Americans owe in credit card debt.

The data also shows that the average monthly student loan payment is $351, and 11.2% of college borrowers are already past due on that debt in 2017.

Is there a way out of what many college borrowers rightly consider a debt nightmare? Maybe – if the path to financial solvency is through student debt consolidation.

Student loan consolidation allows borrowers to “consolidate” all of their college loans into one loan, with one monthly loan payment (which includes student loans your parents took out).

There are caveats. You may or may not get a lower interest rate, depending on your lending institution, and you cannot consolidate non-student loan debt into newly consolidated loans if you borrowed through federal student loans.

In general, there are three main benefits to taking out a consolidated student loan, says Stephen Dash, CEO of Credible.

— “First, you may be able to get a better interest rate, which can save you thousands of dollars in repayment fees,” says Dash. (At Credible, Dash has seen new student loan consolidation borrowers save $19,000 in total loan costs, which is why it’s so important to keep looking for the best loan deal.)

— “Second, you can also change the repayment term of your loan – extending it will reduce your monthly payment, but could increase your overall repayment costs, particularly if you don’t get an interest rate reduction “, he adds.

— “Third, if you have multiple loans, refinancing leaves you with one convenient monthly payment,” says Dash.

Dash notes that there is a difference between consolidating federal loans and refinancing with a private lender. “A federal direct consolidation loan lets you combine multiple federal student loans into a new loan with one payment, and also change your repayment term,” he says. “But you don’t get a lower interest rate. Your interest rate is a weighted average of your existing loans, rounded up to one-eighth of a percentage point.”

“To get a better interest rate on your student loans, you usually need to refinance them with a private lender,” Dash adds.

A side benefit of student loan consolidation is that it can potentially help borrowers secure a mortgage. “For many graduates with debt, a high debt-to-income ratio prevents them from buying a home,” says Michael Lux, founder of The Student Loan Sherpa in Indianapolis. “If you can consolidate to lower your monthly payments, it will improve your ability to buy a house.”

On the other hand, borrowers should be aware that they may lose some benefits with consolidating and refinancing federal loans.

“With federal loan consolidation, your total repayment costs may increase if you increase your repayment term,” says Dash. “This is especially true for borrowers who will not be eligible for loan forgiveness.”

“Also, if you’ve signed up for a federal repayment plan that might entitle you to loan forgiveness after 10, 20, or 25 years of payments, you should be aware that if you consolidate your loans, you could lose money. credit for payments you’ve already made,” he adds.

What are the best ways to consolidate a loan?

According to Lux, the “best approach” to student loan consolidation is to shop around.

“Each lender evaluates applications differently, which means the only way to find your best rate is to apply,” he explains. “It’s also worth revisiting your consolidation if interest rates drop or your credit score and income improve. Unlike a mortgage refinance, there are no transaction costs associated with consolidation or refinancing your student loans.”

As for institutions, traditional banks have largely retreated from the student loan consolidation market, due to low profit margins, Lux says. But there are still many borrowed landing spots.

“Wells Fargo is probably the last of the big financial institutions to stay in business,” he says. “However, many regional banks and credit unions still offer student loan consolidation. There are also a number of fairly new start-ups offering consolidation services.”

Currently, about 12 million borrowers have active consolidated loans in play, totaling $464.5 billion, according to college funding site Student Loan Hero, citing data from Studentaid.ed.gov.

With so many borrowers opting for new student loans, the proof really could be in the pudding.

Under the right circumstances, consolidating your student loan can make it easier to manage your debt, as long as you stick to the terms of the new loan and remain committed to paying it all back.

Editors’ Choice: Originally published August 18.

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