Should I Consolidate my Student Loans?

It used to be pretty simple when I graduated from law school, people consolidated their loans in an effort to lower their interest rates from the high rates in the 1980s and to write only one monthly check.

It's no longer that simple. Since 2007, Direct student loans for both Stafford and PLUS loans have not been variable, but rather fixed at 7.9% for loans with the first disbursement rate on or after July 1, 2006. A consolidation of Direct loans interest rates are now equal to the lesser of the weighted average or 8.25%. Doesn't seem like that great a deal when 10-15 year home mortgages are 4% or lower now.

Besides interest rates, other considerations should be made:

For instance, consolidating the wrong type of loan with others will eliminate certain income adjusted repayment plans. Thus making it more likely the student borrower will default if they cannot reduce an unaffordable payment.

Consolidation of your old delinquent loans into a brand new current loan is an excellent opportunity to get out of default. Consider leaving a consolidation option open for later use. The availability to consolidate some or all of your loans to get yourself out of trouble if you get behind is good strategic planning.

You should never consolidate private loans with federal loans or you lose the rights associated with federal loans. It's not a good idea to consolidate Perkins loans or Parent PLUS loans with other federal loans for the same reason. The Parent PLUS loans will taint the entire consolidation loan and will render the new loan ineligible for the Income Based Repayment Plan (IBR).

Not surprisingly, student loan programs particularly the federal ones are overly complicated and a wrong move could cost you tens of thousands of dollars or more over the life of the loan. Consider retaining competent legal counsel to help guide you through the pitfalls.