When considering the possibility of consolidating student loans it is best to imagine this hypothetical scenario:
Imagine you are walking in a field and you see a small fire. Then you notice a few feet ahead of you another fire, followed by another, and another. In all, you have 7 small fires.
Now, you happen to have a small garden hose handy (Don’t ask why you have a hose in a field with you). In this situation, you have are presented with two choices:
1. Option 1: You get to attack each individual fire one at a time with your garden hose, and each time you put one of the small fires out your hose magically increases the amount of water that is flowing out of it.
2. Option 2: You have the wind blow all the fires together to make one big fire, then you attack that now really big fire with the same small garden hose, but you don’t have the magically compounding hose effect.
In this scenario, the choice is pretty simple, right? Option 1.
Address one small problem at a time, then move on to the next, then wash, rinse and repeat. The same can be said for consolidating student loans.
Consolidating your student loans is like amassing all of your student loans and making one big fire…Instead of paying each individual loan one at a time, then using the freed-up cash (just like in the fire analogy), to attack the next student loan.
So my message to you – rethink consolidating your student loans.
Why is it not smart to consolidate your student loans?
The term consolidate means to combine a number of things into a single or more coherent whole. And while that might make sense when you are organizing all of the papers on your desk at work, when you consolidate student loans you are losing flexibility when paying off your student loans.
Negative consequences of consolidating student loans include:
- 1. Losing the ability to target specific loans
- 2. Extra payments don’t make as much of an impact on such a large principal balance
- 3. Moving federal loans to privately backed student loans means you lose federal benefits
- 4. Longer or extended payment terms
- 5. More money paid overtime
I aim to elaborate on these, however, most will have the inclination to consolidate student loans to get a “better monthly payment” paired with saving a little in interest. However, saving $50 per month in payments to pay thousands more in interest is not worth it in the long run.
By consolidating, you will pay more over the life of the loan due to the lengthening of repayment terms of that loan. The only variable is if you decide to pay more each month to pay off the loan ahead of time.
Additionally, it is important to point out, that the principal balance owed from each student loan is combined together and with interest being calculated off that balance, ultimately you pay more over time in interest.
The consolidation of student loans loses loan flexibility.
By consolidating your loans you might save some interest upfront, but you will in most cases, lose in the long run. The first question you have to ask yourself, is what is the incentive for banks to fund these loans?
The banks make money off the interest you pay, therefore they want you to refinance and consolidate with them. But, flexibility gives you options.
Flexibility refers to the ability to make specifically targeted payments. The concept is often referred to as the “Debt Snowball” that you can read more about here.
Consolidating actually hurts your ability to use the debt snowball approach effectively.
Loss of Federal Student Loan Perks
Taking a federally funded student loan that is serviced by approved federal vendors is risky in the sense that you will lose many of the federal perks.
Deferment, hardship, income-based repayment (IBR) plans and even public service loan forgiveness are lost when you consolidate with a private lender.
If making payments to existing loans is already a struggle, that should be a warning sign.
While consolidating your student loans might reduce your monthly payments, you will lose any hardship and deferment options while also extending your student loan term length!
Side note: Relying on PSLF (public service loan forgiveness) is equally risky, read about PSLF cuts and the risk of relying on it with the bleak long term outlook.
So you might be wondering then…
When does it make sense to consolidate student loans?
In my opinion, consolidating student loans only makes sense when the implications do not negatively impact your cash flow and if you can lock in at a lower interest rate.
For example, my wife and I refinanced and consolidated our student loans in October of 2018. But only after it did not impact our cash flow and we were able to get an interest rate/payment combination that was more effective than our current situation.
One last factor we considered prior to considering a $55,000 and $20,000 student loan was our intentions. We had full intention of paying this now consolidated refinanced student loan off as fast as possible, not sticking with the term length of 15 years.
Our goal was to find the lowest interest, lowest monthly payment as mentioned above so we could use the cash to pay off and target specific loans or our HELOC. (Read how we use a HELOC to pay off student loans here)
So the question remains…
Final Take: Should you consolidate your student loans?
After reading this and analyzing the pros and cons of each side, the choice is ultimately yours if you are considering consolidating student loans.
Every borrower and every student loan situation is a little different. Blanket statements can't cover all scenarios, however, it is important to keep in mind the following:
Pros of Consolidating Student Loans
- Smaller monthly payments
- Lower interest rates
- Manageable student loan repayment
- Less worry or stress about student loans
Cons of Consolidating Student Loans:
- Lose flexibility to pick and choose
- Lose federal student loan perks
- Extend loan term
- More paid to interest over loan life
My biggest piece of take-away advice would be to have a plan either way. Consider making extra payments and plan on paying the loan off quicker than the designated terms.
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and many more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their newborn son, their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! In case you were wondering, Josh uses Personal Capital to track his net worth and his first investment account ever was an Acorns account 😎