4 Times You Should Consolidate Your Student Loans

Less than half of millennials have considered refinancing or consolidating their student loans -- here’s why that might be a mistake.Image source: Getty Images.

Nearly 2 out of every 3 millennial college graduates expect to be making student loan payments well into their 40s, according to a study by Citizens Bank. On top of that, those same graduates are putting 20% of their salaries toward student loan payments, making it increasingly difficult for them to afford basic necessities, much less save for retirement.

Even though millennials are facing financial uncertainty, the study also shows that fewer than 50% have considered refinancing or consolidating their student loans. While student loan consolidation isn't right for everyone, some graduates do stand to benefit financially from it. Here are signs that student loan consolidation might be the solution you’ve been searching for.

1. You can’t afford your monthly payments

If your present budget is unmanageable, loan consolidation can lower your monthly payments by extending your repayment term. The catch here is that you will likely end up paying more over the length of the loan due to accrued interest. Basically, the longer you take to pay off your loan, the more you’ll pay in interest over time.

If you’re currently managing your monthly payment without any issues, loan consolidation may not be in your best interest. However, if you’re at risk of defaulting or are significantly struggling with your finances, student loan consolidation can help.

2. You need to simplify your monthly payments

Consolidation streamlines the payment process by consolidating all your loans into one overall loan, leaving you with only one monthly payment to manage. This can be helpful if you have multiple loans with different lenders and are having trouble keeping track of them. Managing one single loan can make things a little less overwhelming, but if simplification is your only reason for consolidating, consider coming up with a better system for organizing your payment due dates first.

3. You want to increase your repayment flexibility with a Direct Consolidation Loan

Consolidating your loans with a federal Direct Consolidation Loan can open up additional repayment plans and forgiveness programs, which can be a great benefit to some.

Let’s say you have some older federal loans through the Federal Family Education Loan (FFEL) or Perkins Loans programs. You won’t qualify for income-driven repayment plans or Public Service Loan Forgiveness (PSLF) through these programs. However, if you choose to consolidate with the Direct Loan program, you can take advantage of these new benefits, giving you some financial relief.

Keep in mind that private loans aren’t eligible for federal consolidation, and you may not gain additional repayment options if you already have federal direct loans. Additionally, income-driven repayment plans and Public Service Loan Forgiveness aren’t right for everyone, so make sure these are your best repayment options before consolidating.

4. You want a fixed interest rate

If you have multiple loans with variable interest rates, consolidation can provide a fixed interest rate. A fixed rate will allow you to plan for the same loan payment each month for the life of the loan rather than being at the mercy of market conditions that impact your interest rate. If you think your variable interest rate might go up, consider consolidating your student loans into a fixed-rate loan.

There are certainly benefits to student loan consolidation. You can gain more breathing room in your current budget and take advantage of additional repayment options. However, if your goal is to save money and pay off your student loans quickly, other options such as student loan refinancing and paying more than the minimum might be a better fit.