Should You Consolidate your Student Loans?

One of the impacts of the increasing cost of higher education is the increase in the total student loans college graduates are saddled with. For those that used student loans to help pay for college, the average indebtedness rose above $35,000 in 2015. That's up from roughly $20,000 per borrower that was the case 10 years earlier in 2005.

As a result, students and parents are looking into what options they have. For the purposes of this article, we'll take a look at how to determine whether or not you should consolidate your federal student loans. I know, many have private student loans in addition to their federal debt. However, private student loans and federal student loans can't be consolidated together. This is why we'll focus on federal loans.

The major benefit to consolidating federal student loans, in a majority of cases, is going to be convenience. Students wrack up multiple loans over their college career, resulting in different interest rates and potentially multiple lenders to be repaid. Consolidation of federal student loans results in one payment to one lender at one interest rate.

While this convenience alone can certainly be worthwhile for students, there isn't a real financial benefit to consolidating federal student loans. When a loan is consolidated, an average interest rate is determined for the total amount of your aggregated loan. This is different from a refinance where borrowers could come away with a lower interest rate. Also, federal student loans are and have been issued at fixed interest rates for some time, removing the potential benefit of taking variable interest rate loans and making them fixed as some private loan consolidation offers.

When it comes to repayment strategy, forgoing consolidation actually provides students with additional flexibility. With multiple smaller loans as opposed to one large loan, students are able to identify a loan that they can put more money toward beyond the minimum requirement while paying the minimum on their other loans. This continues until the targeted loan is paid off, at which point the student takes the money that was targeted toward the paid-off loan and starts using it to pay off the next loan they identify. There are several ways to target a loan for additional payments. Here is an article discussing the three most common strategies. While this discusses credit card debt, the same ideas can be used when it comes to student loans.

Instead of consolidation, some students would be better off looking into programs that lower their required repayments, such as income-based repayment. This can provide students with a new monthly minimum repayment commitment, or even extended deferment, commensurate to the student's income. Here's additional information on income-driven repayment plans.