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Student loan consolidation can combine all your federal loans together for one easy monthly payment. Plus, it gives you the chance to reduce your monthly payments by extending your repayment term, which can help you get out of default (or avoid it in the first place).

But while there are benefits, student loan consolidation is not always the best option for everyone. Let’s consider the following…

When consolidating student loans is a bad idea

While there are some good reasons to pursue this strategy, consolidating student loans isn’t always a good idea.

Note that we’re referring to direct loan consolidation here, which involves combining your federal loans and choosing a new repayment plan. Refinancing can also combine several loans into one, but it’s a different process that’s done with a private lender and typically results in a lower interest rate.

With that in mind, here are five times to avoid a direct consolidation loan:

1. Consolidating could raise your interest rate
2. Choosing a long repayment term will make your loan more expensive
3. You can’t consolidate private student loans
4. Student loan consolidation could hurt PSLF payments
5. You could lose benefits

1. Consolidating could raise your interest rate

When you apply for a direct consolidation loan, you bundle your federal student loans into one new one. While this can simplify repayment, it could raise your interest rate slightly.

Your new interest rate will be the weighted average of your old rates rounded up to the nearest one-eighth of a percent. To estimate what your new rate would be, use our weighted interest calculator. You can also use our student loan payment calculator to estimate your long-term interest costs with your new rate.

Consolidating can also increase interest costs by causing capitalization to occur. When your interest capitalizes, it gets added on to your principal balance. You pay back the larger amount, so you’re essentially paying interest on your interest.

Both the slightly increased rate and capitalization could lead to higher interest costs for you.

2. Choosing a long repayment term will make your loan more expensive

When you take out a direct consolidation loan, you have the chance to choose new repayment terms for your loans. Going with a long term of 20 or 25 years may lower your monthly payments, but it also means you’ll pay more interest in the long run.

Let’s say you’re paying off $35,000 at a 5.05% rate on a 10-year term. If you extend your terms to 20 years, you’ll end up paying an additional $11,019 in interest. If you go with 25 years, you’ll pay $17,038 more in interest.

While this move might make sense if you need to lower monthly payments, it’s not so helpful if you’re trying to save on interest. That said, you can always make extra payments to pay off your loan faster without penalty.

3. You can’t consolidate private student loans

In general, private student loans aren’t eligible for direct consolidation loans. So if you’re planning to consolidate to simplify repayment, remember that your private student loans won’t get combined with your federal ones.

Note that you can combine private and federal student loans when you refinance with a private lender. If you can meet credit and income requirements — or apply with a cosigner who can — you could potentially qualify for a lower interest rate, too.

But refinancing federal loans turns them private, making them ineligible for future direct consolidation loans or other federal plans. As such, you should make sure you understand what you’d be sacrificing before refinancing any federal student loans.

4. Student loan consolidation could hurt PSLF payments

According to the Department of Education, you’ll lose credit for payments already made through Public Service Loan Forgiveness (PSLF) or income-driven repayment plans, like Income-Based Repayment, if you consolidate your student loans.

PSLF forgives federal student loans after 10 years of working in public service. But if you consolidate your loans, you reset the clock on your repayment term, even if you’re already a few years into an income-driven repayment plan.

If you’re already a year or more into your pursuit of PSLF, be careful not to lose your progress through student debt consolidation.

5. You could lose benefits

Student loan consolidation could also result in the loss of certain benefits. As mentioned, you could lose your progress toward loan forgiveness when you consolidate. Plus, you might have to say goodbye to interest rate discounts you’re currently receiving.

You could also lose your student loan grace period, which typically lets you delay repayment of your loan up to six months after you graduate. To avoid this, you can ask your loan servicer not to process your consolidation application until the end of your grace period is near.

Finally, Perkins loan recipients could become ineligible for Perkins loan forgiveness if they consolidate.

Before applying for student debt consolidation, make sure to ask your servicer if you’ll lose any benefits. If you will, consolidating student loans might not be a good idea.

When consolidating student loans is a good idea

While we’ve focused on the potential downsides of consolidating student loans, there are benefits to this approach, as well.

If the idea of having one payment every month sounds enticing, student loan consolidation might be for you. It can be overwhelming and confusing to have many payments to a bunch of loan providers, so it can simplify things to concentrate on a single loan payment.

Consolidating your student loans also won’t affect your credit score much. Federal consolidation doesn’t incur a credit check, so it won’t hurt your credit score.

If you qualify, consolidating federal loans also gives you the freedom to get on an income-driven repayment plan or extended plan, which could make your monthly payments more affordable.

Consolidating also lets you switch to a new federal loan servicer, which might be a welcome change if your current loan servicer has been unhelpful or difficult to work with.

Finally, applying to consolidate student loans is one way to get them out of default and back into good standing. The other is to apply for student loan rehabilitation.

If these pros outweigh the potential cons, student loan consolidation could be a good idea.

Understand the difference between consolidating and refinancing

While we’ve focused on federal student loan consolidation, it’s not the only way to combine several loans into one. You can also combine your loans, whether federal or private, through student loan refinancing.

One of the benefits of refinancing is potentially lowering your interest rate. If you or your cosigner have strong credit, you could qualify for a lower rate than you have currently.

Plus, you can choose new repayment terms, usually between five and 20 years. Changing your terms will adjust your monthly payment, allowing you to pay a bill that works with your budget.

But as mentioned, refinancing federal student loans makes them private, so you’ll lose access to federal protections, such as income-driven repayment plans and PSLF. Make sure you don’t need any federal benefits before refinancing federal loans.

If you’re not sure if it’s better to consolidate student loans, refinance or leave your loans alone, our consolidation versus refinancing calculator can help.

Rebecca Safier contributed to this article.

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