What is student loan consolidation?

Student loan consolidation is a process by which the U.S. Department of Education or a private lender will pay off the balances of all your outstanding loans, taking the total amounts of the payoffs of these loans, and combining them into one new loan called a consolidated loan. This process normally gives the borrower an extended repayment period and lower monthly payments to repay the loan debt.

Beside the advantage of having a single payment to make, once the loans are consolidated a borrower will then be eligible for new student loans(s), financial aid, and most of the original options they received when they took out their original loans, such as deferments and forbearance. The borrower also avoids wage garnishment, treasury offsets, litigation, and more accumulation of collection cost.

Consolidation is not your main objective, however. It is only a temporary vehicle to help you in your goal which should be completely ridding yourself of the debt. You need to become conscious that all debt, with the exception of income-producing debt, hinders your ability to save and invest to create a better future. Therefore, at some point you should start a plan to accelerate your payment to get out of debt sooner.

Your challenge is not unique to you. The Chronicle of Higher Ed took a look at student loan default rates, and they’re much worse than people had previously thought, and concluded a whopping “20 percent of the government student loans that began repayment in 1995 have been defaulted on”. But if you look at the long-term figures it really paints a more accurate and disconcerting picture. Fifteen years after repayment begins, 31 percent of government student loans made to community college students eventually go into default. Even more alarming are a staggering 40 percent of students who use their federal student loans at for-profit schools default on their loans.

There are several reasons why student loan borrowers end up consolidating their student loans. The most obvious reason is the convenience factor of being able to combine all of their student loans into one simple payment. Interest rates become fixed after a student loan is consolidated. Consolidation is also a short term solution to get student loans out of default in as little as 2 weeks to 6 months; however there’ll be potentials risks that come with consolidating a federal student loan while in default and should be avoided if possible.

The most advantageous reason for consolidating your student loans is the flexibility you’re afforded to switch repayment options when needed because it provides the ability to either shorten or extend the payment period on the loan(s). This can help you in your objective to get out of this debt the sooner than later. But, in the event of personal financial crisis when it becomes difficult to pay the debt, you can decide to extend the repayment period to lower the monthly payment, and then switch it right back to your prior repayment plan as soon as your financial condition changes.