A reader asks: How do I know if consolidation is right for me?

A reader asks:

I have no idea if consolidation is right for me. Are there times when it can help you? Is there ever a time when it’s a bad idea? Will it save me money?

Josephine in Texas

Hey, Josephine!

Consolidation is often touted as the great fixer, like, “If I can’t afford my loans I’ll consolidate!” But consolidation is not always the best thing to do.

For brevity’s sake, I will cover the major pros and cons, although I acknowledge that there is a lot to get into on the subject of consolidation. Here are the basics:

Consolidation can help borrowers the most when it turns FFEL loans into Direct Loans. Direct Loans are eligible for Pay As You Earn or Public Service Forgiveness (PSLF), programs for which FFEL loans are ineligible. Consolidating FFEL loans may make those loans eligible for such programs, but consult your servicer no matter what, because other qualifications factor into loan eligibility for those programs.

Also, consolidation can lower your monthly payment, as the servicer will take your loan out between 10-30 years depending on your debt. And if you have a variable interest rate, consolidation will make it fixed. All of this, it will do under a single servicer.

But when it comes to PSLF, consolidation may not be a good choice. If you consolidate your PSLF while making payments, the consolidation will erase all those payments and you start at 0 again — and you need 120 payments for forgiveness. If you do consolidate anyway, this is why you may not want to include all loans.

Also, you rarely save significant interest on consolidated loans. The weighted interest rate on consolidated loans will usually cost more interest due to the increased life of the loan.

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