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Pros and Cons: Private Student Loan Consolidation

When you’re drowning under the weight of high student loan payments, managing your budget can feel like a tightrope walk.

Consolidating your private student loans may be a smart way to get some relief from burdensome bills, but there are facts to consider before you take the plunge.


A thorough understanding of the pros and cons of private student loan consolidation can help you make an informed decision. 

Pros of private student loan consolidation

When you consolidate your private student loans, you’re essentially refinancing multiple loans with one new one that’s offered at current market rates. There are some significant benefits that go along with that.

1. You could lower the total cost of your loan

A lower interest rate can reduce the amount you pay over the life of your loan by thousands of dollars.

Imagine you have a 15-year, $20,000 loan. A 2% reduction in the interest rate would save you $400 per year. That’s $6,000 over the life of the loan.

2. You could improve your ability to buy a car or qualify for a mortgage

Student loan consolidation could put that new car or house within reach.

How? Private student loan consolidation may decrease your monthly loan payment, which will bring down your debt-to-income ratio. This ratio compares your monthly income to your monthly payments for things like loans, credit cards, and housing costs.

In your lender’s eyes, if you have lower student loan payments, you’ll have more income available to pay your bills. Voila! You’re suddenly a better candidate for a mortgage or car loan.

3. You can consolidate multiple loans into a single payment

Keeping up with multiple payments—especially if you have loans from both undergraduate and graduate programs—can feel like a second job.

With private student loan consolidation, you can bring all those loans under one roof. Managing one monthly payment instead of several will make it easier to stay current.

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Cons of private student loan consolidation

Before you pull the trigger on consolidation, be aware that there are a few things to look out for.

1. If you have bad credit right now, getting a good interest rate for consolidation may be challenging

If you’re consolidating federal student loans through a federal Direct Consolidation Loan, your new interest rate will not be dependent on your credit score.

However, it’s a different story for private student loans. Student loan consolidation when you have bad credit might mean that you don't get the best interest rate possible.

So what should you do? It might be a good idea to take time and pay down credit card debt before applying for a consolidation.

Remember, one of the main factors in credit scoring is how close your balance is to your credit limit. Plus, paying down credit debt will improve your debt-to-income ratio. 

2. Seeking new student loans can cause a slight dip in your credit score 

As with any kind of loan shopping, applying for a new private student loan can cause your credit score to drop by a few points.

Limiting your comparison-shopping to 15 days can minimize the impact and make it more likely that you won’t see a change in interest rates.

3. Be careful about consolidation if you were planning to take advantage of federal student loan benefits

It’s important to note that there are major differences between consolidating private student loans and federal student loans.

Some federal student loans have appealing features that private lenders don’t offer—like income-driven repayment plans and guaranteed breaks in payment if you experience economic difficulties. If you’re working for a public service employer (or plan to), your remaining loan balance could be forgiven through a federal loan forgiveness program.

Before consolidating federal student loans, consider your career path and finances. Do you have enough in savings to cover your student loan payments if you hit a financial snag? If so—and you don’t qualify or need the income-driven repayment options or loan forgiveness—consider consolidating privately so you can take advantage of potentially lower interest rates.

To find out how much you could save by consolidating your student loans, see our Student Loan Consolidation Calculator. 

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