Why Paying to Consolidate Student Loans Is a Rip-Off

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Money decisions can feel overwhelming when you’re making them on your own. It can lead to paying for services you could have taken care of yourself — or worse, falling victim to a scam.

This can happen when you’re looking for help with student loan consolidation, a free process through the federal government that some companies charge a fee to sign you up for. Here’s how to prevent that from happening to you.

What is student loan consolidation?

Student loan consolidation entails combining multiple loans into one larger loan, with the new loan paying off the previous debts. Consolidating loans can make debt management easier because you now have just one creditor to pay, and it may yield additional benefits for borrowers, depending on the type of loan you have.

For federal student loan borrowers, consolidation may give you access to alternative repayment plans, like income-driven repayment, which can make monthly payments more manageable. For private student loan borrowers with good credit, consolidation could result in an interest rate reduction, which can mean paying less overall. It’s important to note, however, that just like private education loans, private consolidation loans give you the option to choose a variable interest rate – which could potentially increase during the repayment period.

Student loan refinancing vs. consolidation

Student loan refinancing is the act of paying off your student loans with one new loan — very much like consolidation. The difference is you can combine private and federal loans into one this way, which isn’t possible with federal loan consolidation. And refinancing is offered only by private lenders, not the federal government.

Refinancing can help you turn a variable interest rate into a fixed rate if that’s your goal. Pursuing student loan refinancing can also be a good idea if you want to make a single loan payment every month or lower your interest rates. But it doesn’t come without risk. For example, if you have federal loans, refinancing them means turning them into private loans. And that means losing out on important benefits like student loan forgiveness and generous payment postponement options.

Consolidating multiple loans through the federal government turns them into a single direct consolidation loan. That gives you a single monthly payment and keeps your loan federal so you can maintain the protections that come with it. Consolidating federal loans generally does not lead to an interest rate reduction, though. Your new interest rate will be a weighted average of your previous rates, rounded up to the next one-eighth of 1%.

Don’t pay to consolidate your student loans

The reason you shouldn’t pay to consolidate student loans is simple: You can do it yourself.

Companies that offer to consolidate your loans cannot change the terms of those loans. They may charge an upfront fee in exchange for the promise of forgiveness or lower payments after consolidation. But you don’t have to pay a fee to get lower federal loan bills through income-driven repayment, which also provides forgiveness after 20 or 25 years of payments.

How to consolidate student loans on your own

Here are steps on how to consolidate student loans on your own.

1. Decide if you should consolidate or refinance

The first step is to ask yourself: Should I consolidate my student loans?

If you have just one loan and the possibility of more favorable terms — and won’t need to rely on federal loan protections — then student loan refinancing is likely best. The same goes if you have both federal and private student loans, or all private loans, and you want to combine them into one with a lower interest rate.

But if you have federal student loans only and you want to bring them under one servicer with one payment, consolidation could be your tool. Consolidation also qualifies you for income-driven repayment plans and the federal Public Service Loan Forgiveness program if you have certain types of student loans.

2. Apply for free

Federal student loans can be consolidated through a direct consolidation loan. Fill out a free application online through the Office of Federal Student Aid.

If you’ve got private student loans only or a mix of federal and private loans, see if you qualify — and compare lenders — using our list of lenders to refinance with, which includes their current rates and terms.

As you weigh your options, consider using our free student loan consolidation calculator to explore potential new loan terms.

3. Choose terms that will help you reach your goals

No matter what, focus on the loan terms that will help you reach your goals. For example, lower monthly payments often mean a longer repayment timeline, keeping you in debt for longer. A lower interest rate with a shorter loan term, on the other hand, could mean higher payments but getting rid of loans faster.

Decide what’s most important to you. If you’re struggling to make ends meet, you may want a longer repayment term if that’s the only way you can get lower payments. If faster repayment is your top priority, go for a shorter loan duration.

4. Know the details and potential downsides before you sign

Finally, before you consolidate, read the fine print on your new loan. For example, you’ll need to understand:

  • Your new interest rate, and whether it’s fixed or variable
  • Your new monthly payment
  • Your new repayment term
  • Any drawbacks, such as loss of federal borrower protections when refinancing to a private loan

The more you know about the process, the less likely you are to spend money unnecessarily to pay off your student loan debt. You can confidently enter into a successful loan consolidation or refinance without having to rely on — or pay — anyone else.

Laura Gariepy contributed to this report.

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