Student loan consolidation risks: What borrowers need to know

Student loan consolidation can be a great way to make paying your loans back easier, but there are a few risks to watch out for.

Lots of people have student loans. Some are larger than others, some have more onerous terms than others, and some are a bigger pain than others.

But one option that has been available for most federal loans for most people is student loan consolidation.

Student loan consolidation allows you to take multiple student loans, all with their own payments, due dates, and interest rates, and combine them into a single monthly payment. Typically, the interest rates are averaged between the loans, but you do sometimes get a slight interest rate credit for the process. When I consolidated my student loans, I got a 0.25% interest rate reduction. Not much, but I took it gladly.

The benefit of consolidation is administrative: you have one loan to deal with and not many of them. And that’s a good thing!

In many cases, consolidation works for most people.

But not always. And in this post, I want to talk about the risks of student loan consolidation. These are times when you might want to think twice about trading in your many loans for a single one.

You may pay longer (and more)

While having one payment is great, the terms can change on the loan itself. This means that you might have the loans for a longer period of time.

I recognize that that could be good or bad. A longer term can mean lower monthly payments, which is good, except if you’re planning on paying your student loans off. Lower monthly payments can mean higher total payment in the long run.

Now granted, most loans allow you to pay off the loan faster if you choose, so you aren’t locked into a longer term. But it’s something to be aware of.

You can only consolidate once

You can’t consolidate your loans more than once. So once you do it, there’s no going back.

Again, this isn’t a big concern, but it’s good to be aware that whatever terms you have in the consolidation process will be the terms you have for the duration of your payback.

You could lose your loan forgiveness credits

To me, this is the big one.

Many people with student loans are in a repayment plan that offers eventual loan forgiveness. These are income-based payment plans (IBR) that can offer forgiveness after 20+ years. And if you are part of the Public Service Loan Forgiveness (PSLF) program, your loans can be forgiven after 10 years of repayments.

Each month that you make a payment, your tally goes up by one. And when it gets to 120, 240, or whatever the appropriate number of months are for your situation, you are eligible to have your loans forgiven.

But here’s the deal that many people don’t realize: when you consolidate, in many cases, your loan forgiveness payment count will return to zero.

This is new. It was enacted as part of new legislation that terminated the SAVE repayment plan. According to Forbes:

After a federal court approved a settlement agreement between the Education Department and GOP-led state challengers in March to terminate the SAVE plan, all of the regulations associated with SAVE, including provisions that impact other income-driven repayment plans, have now been vacated. One of those provisions provided an important protection for borrowers by allowing them to retain any existing credit toward IDR student loan forgiveness on loans included in a Direct consolidation. With those regulations now no longer in effect, borrowers who consolidate federal student loans with existing IDR credit will now likely lose that credit, starting them over at the beginning of their 20 to 30 year IDR loan forgiveness term.

So if you started making a lot of payments toward loan forgiveness under your current repayment plan, and you haven’t consolidated your student loans, you may want to hold off, as the benefits of consolidation aren’t going to be as big as getting your loans forgiven.

Granted, there are issues with getting your loans forgiven (as in, the “tax bomb”), but that’s a different topic.

Loan consolidation is good but comes with risks

The student loan landscape changes fast and often. Back in the Biden administration, there were actions created (new plans, forgiveness options) to make loans easier to pay off. In the current administration, most of those actions have been reversed. We can debate whether that’s a good thing, but personally, I’m not a fan. And I say that as someone who paid off their student loans without any income-based repayment or forgiveness. I want you to have options I didn’t, because the student loan landscape is different now.

And student loan consolidation can be a benefit to you. Just not always.