College graduation should be a time of new experiences and excitement. However, many college graduates feel overwhelmed by the amount of student loan debt they collect throughout school. It can be stressful trying to keep track of multiple loans, multiple lenders, and multiple interest rates. Many graduates hear about loan consolidation and ask themselves if they should consolidate their student loans, but it may not be as simple as they think, and it requires a great deal of consideration before making a final decision.

What is Student Loan Consolidation?

When college graduates have multiple student loans, they may consider consolidating their student loans in order to simplify the loan repayment process. A direct consolidation loan from the federal government can be used to combine multiple federal student loans together. The federal government offers these loans at no additional upfront cost. The new loan will offer a single monthly payment at a fixed rate instead of multiple payments with multiple interest rates.

Is it Good to Consolidate Your Student Loans?

It is a common misconception to think that consolidating student loans through the federal government will save money. This is not true, technically speaking the interest rate on federal consolidation loans is based on a weighted average of the previous interest rates. Since the new rate is just an average, there is no actual interest rate reduction, meaning there is no savings in interest. Additionally, the repayment term on a consolidation loan is typically extended. With an average interest rate and longer repayment term, the borrower will typically pay more over the life of the loan.

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With that being said, there are still benefits to student loan consolidation through the federal government. It is an effective way to seek relief from monthly payments that are unmanageable. This is seen in two ways. First, there are fewer monthly payments to deal with than before. Second, extending the repayment term reduces the monthly payment, allowing borrowers to cover other expenses each month.

Aside from not saving money, there are a few drawbacks to student loan consolidation. Private loans cannot be consolidated with federal loans through the federal consolidation program. These loans would need to be refinanced through a private lender if they were to be consolidated in any way. Additionally, federal benefits that are specific to a certain loan program will be lost after consolidation.

Overall, student loan consolidation is a good choice if you cannot handle your monthly financial obligations. Although it cannot save money, it could still be used as a tool for financial relief. There are other options, however. There are other similar financial options that should be considered such as student loan refinancing. Refinancing is a service offered by private companies and banks that consolidates student loans and offers a new interest rate that is determined by an underwriting criteria. Not every applicant can successfully apply though, so it takes some research to get it right.