Let’s discuss the details of student loan consolidation and how it can help or hurt you.

Firstly – this is a huge distinction, there are 2 major categories of consolidation, 1) Private Consolidation and 2) Federal Consolidation. These are very, very different events for your student loans, and we wish they didn’t have the same name. In fact, the better term for Private Consolidation should be “Refinance.”

The details - For your federal student loans, your lender is the Federal Department of Education. If you use Private Consolidation, you are refinancing the loans (paying them off) from the Federal Dept of Education and taking out a NEW loan with a private company. And therein lies the issue, the loans are no longer borrowed from the federal government, they are now held with a private for-profit company. So, the protections of the federal student loan system are gone. The ability to enter Income-Driven Repayment, loan forgiveness, and even forgiveness at death or disability are gone when Private Consolidation occurs.

This is contrasted with Federal Consolidation. Again, the money for Federal student loans originates or is borrowed from the Department of Education. When you receive the funds, you are assigned a servicer. The servicer tracks you, your address, the interest, and any payments made. A veterinary school student could have several servicers, and this may be very confusing. Different servicers have different log-ins and portals. Different names and addresses. To further complicate the situation, servicers commonly change their names, go out of business, and are bought and merged into other servicers, and their loans (and borrowers) must go along for the ride.

To check current servicers, loan amounts, and interest rates, a borrower can always go to studentaid.gov for a complete dashboard of their federal student loans.

For Federal Consolidation, the lender doesn’t change, just the servicer. Basically, the borrower is joining their federal loans under the same servicer for the convenience of dealing with one servicer. The loans are still in the Federal system and Federal protections and programs are still available.

Therefore, Private Consolidation and Federal Consolidation are very different. Before taking your loans out of the Federal System and refinancing with a private company, please stop and double-check to make sure the decision is right for you. This is literally a once-in-a-lifetime decision, once you take your loans out of the federal system, they cannot go back in!

Now, the next logical question is, why does Private Consolidation exist at all? There are some people that do benefit from refinancing. Usually, private consolidation offers a lower interest rate, which can save money, IF you don’t plan to use an income-driven repayment plan or forgiveness. This is usually best for people with relatively low loan balances and higher incomes defined by a debt-to-income ratio of generally less than 1:1.

However, the lower interest rate has not been beneficial since the Spring of 2020, because the federal interest rate was reduced to 0%! So, private refinancing companies have been very inactive.

It’s always best to do the financial math and run the numbers before deciding to privately refinance, and the best place is the VIN Foundation Student loan Repayment Simulator. There, they have done all of the hard work. You can upload your studentaid.gov file, enter your projected salary information and possible life events, and look at which repayment plan saves you the most money. More information on the repayment calculation is coming soon!

Back to the “it depends” answer. What are the downsides to Federal Consolidation?

When consolidation occurs, any unpaid interest will capitalize. This means that the principal balance of the loan could increase. Also, Federal consolidation may extend the amount of time a borrower has to pay.

Regarding the interest rate, when federal consolidation is used, the interest rate is calculated using a weighted average. Meaning that the borrower has a very similar but not exactly the same interest amount.  

Lastly, and this is the most important. Federal Consolidation will restart the countdown on any Income-Driven Repayment plan, meaning that the borrower has to start the plan over! Federal Consolidation is not recommended for anyone that is in repayment.

If you are considering Federal Consolidation it's best to take advantage very soon after graduation. As in, during the month you graduate!

If this seems like a confusing and daunting subject, that’s because it is! Whether or not to consolidate however is a huge decision and not to be taken lightly.

To summarize –

1) Private consolidation is different fromFederal Consolidation

2) Private consolidation removes loans from the Federal system and forecloses access to Federal programs and protections.

3) Federal consolidation may increase the principal balance and restart any repayment programs.

4) DO THE MATH - take advantage of the VIN Student Loan Repayment Simulator and calculate if consolidation is worth it. Know the details and exact numbers before you consolidate.