Should You Consolidate Student Loans?

NEW YORK (MainStreet)—Virtually no one is excited to deal with student loans, but given the 27 million odd borrowers with outstanding student loans and nearly 12 million Americans taking out student loans every year, millions are looking for ways to ease the burden of ever-accruing student debt.

One possible answer is loan consolidation, which basically means combining your various debts into one bill. Consolidating can simplify your life and reduce your monthly minimum payment, but it often comes with strings attached.

To break down the pros and cons, we spoke to certified financial planner Lauren Lyons Cole and Mark Kantrowitz, creator of FinAid, a comprehensive source of financial aid information and tools.

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Note that our advice will vary greatly depending on whether your loans are federal or private. "Private loans can't really be consolidated," Lyons Cole says. "It's more like refinancing." The two situations are very different, so be very clear on whether you're dealing with federal or private debt.

Federal Loans: Reasons to Consolidate

One of the biggest reasons is to simplify your repayments: When you consolidate, you go from having a bunch of separate loans to one monthly bill. "It's an easier, more organized way of keeping track of what you owe," Lyons Cole says.

Kantrowitz explains that consolidation might easily replace 8 to 12 loans in one fell swoop, because students typically take out a separate loan for each year of school. If you have three types of loans, then you might have a version of each from freshman, sophomore, junior and senior year. That's a lot of separate bills to remember. If you're feeling discombobulated by all the separate little loans, you might find consolidation helpful.

Another reason some people consolidate is to decrease their monthly payments. Lyons Cole tells us that when you consolidate, you restart the length of your loan, which means you can repay your debt over a longer time frame. While that can reduce your monthly minimum payment, don't fool yourself into thinking this is free money; easing your monthly burden now means paying significantly more over the lifetime of your loan, because there's longer for interest to accrue. Still, if you're in a pinch and struggling to pay your monthly minimums, this could help you get over the hump.