If you have student loans along with debt from several sources, such as credit cards and personal loans, it can feel like you need a degree in accounting just to manage it all. Thus, the idea of consolidating all your debts can sound tempting.
A debt consolidation loan is a single unsecured personal loan you take out to replace multiple existing debts. People often use them to combine and pay off credit card debts because consolidation loans typically allow you to refinance high-interest debt at a lower fixed interest rate.
Additionally, you’ll have a single monthly payment with a defined loan term and payoff date. You can choose the loan term, so you can adjust your monthly bill to your current budget and ability to repay.
Consolidation can make it easier to manage your budget, keep track of payments, lower your monthly payment, and even pay off your debt more quickly. But there are a few things to consider before you combine your student loans and other debts into a debt consolidation loan.
Can I Consolidate Student Loans and Other Debts Together?
Once you involve student loans in the consolidation process, the situation gets trickier. You can consolidate federal student loans with a federal direct consolidation loan.
This type of loan combines your eligible federal student loans into a single loan with a single monthly payment and fixed interest rate. A direct consolidation loan doesn’t lower your interest rate. Instead, it keeps it roughly equal to what you were paying before by using the weighted average of the interest rate on your previous student loans.
The primary benefit of a federal direct consolidation loan is that you retain access to all the federal student loan repayment options, including income-driven repayment, the Public Service Loan Forgiveness Program, generous deferment and forbearance terms, and debt cancellation and discharge options under certain circumstances.
You cannot consolidate private student loans or personal debt, such as credit cards, with a federal direct consolidation loan. Only federal student loans, including federal direct, federal direct PLUS loans, Stafford loans, and Perkins loans are eligible.
It’s also possible to consolidate both federal and private student loans together through a private refinance loan. Unlike a federal direct consolidation loan, which the United States Department of Education issues, a bank or credit union issues a private student loan refinance loan. Typically, the primary purpose of these loans is to get a lower interest rate, but they can also consolidate all a student loan borrower’s loans into a single loan.
You may not want to refinance your federal student loans since it means losing access to all the federal repayment options, borrower protections, and forgiveness programs. And just as with a federal direct consolidation loan, you can’t use a student loan refinance loan to pay off your credit cards and other debts.
But you can consolidate any kind of debt with most personal loans taken out from a private lender. That means it’s possible to consolidate student loans with other types of debt, regardless of whether it’s from the federal government or a private bank.
There are some exceptions. Not all personal loans allow consolidation of all types of debt. For example, Payoff is a lender that only offers personal loans to pay off credit card debt. But with most private loan lenders, there shouldn’t be an issue sending a check to a student loan servicer or credit card issuer to consolidate both into one new personal loan.
Should I Consolidate All My Debt Together?
Just because you can do something doesn’t always mean you should. Carefully consider the advantages and disadvantages before taking out a personal loan to consolidate your student loans with your other debts.
Advantages
The advantages of consolidating your debt include making your budget easier to manage and potentially saving money — both in the short and long term.
1. You’ll Have a Single Loan With Just One Monthly Payment
Consolidating all your debt together can make your monthly budget much easier to manage. Because you have just one loan, you have only one payment to keep track of. You’ll no longer be making multiple payments to multiple creditors with multiple due dates.
That means there’s less chance of accidentally missing payments and risking late fees.
2. It Could Lower Your Overall Interest Rates
Consolidation allows you to refinance your debt at a lower interest rate. And that can save you considerable money.
For example, suppose you currently owe $10,000 in credit card debt at the average interest rate of 16.30% as of 2021, according to Federal Reserve data. According to the same data, the average interest rate for personal loans in 2021 is 9.58%.
If you take 10 years to repay your credit card debt, you’ll have paid a total of $20,327 — or more than double what you originally owed just in interest.
But if you refinance your debt at an interest rate of 9.58% and take the same 10 years to repay, you repay only $15,580 — or $5,580 in total interest.
Lowering your interest rate can make a massive difference in the amount of money you save over the life of the loan.
But to consolidate debt to a lower interest rate, you need good credit, including a high credit score, a stable income, and a credit history free of major delinquencies. If you’re not sure where your credit currently stands, check your credit score.
You can also get one free credit report annually from each of the three major credit-reporting bureaus by visiting AnnualCreditReport.com.
If your credit isn’t sufficient to qualify for the best rates, applying with a co-signer can help.
Before going with any one lender, compare rates and terms from several to ensure you’re getting the best possible loan. A marketplace like Credible allows you to apply in one place and get matched with offers from several lenders without it affecting your credit.
3. You Could Have a Lower Monthly Payment
When you consolidate your debts into one loan, you can reduce the total amount you’ve been paying every month by lowering the interest rate or extending the repayment term. A lower interest rate means you can take the same amount of time to repay a loan, but the monthly payment is lower.
For example, $10,000 repaid over 10 years at 16.30% interest gives you a monthly payment of $169. But at 9.58% interest, your monthly payment for the same loan term reduces to $130 per month.
You can also reduce your monthly payment by lengthening the loan term. For example, if you take 15 years to repay your $10,000 loan at 9.58% interest, your monthly payment becomes $105.
A lower monthly payment can give you more wiggle room in your budget, which can make a big difference if the debt is causing a strain. You can use the extra cash to pay off your debt more quickly. Or you can use it to build an emergency fund, save for a down payment on a house, or invest in your retirement accounts or your child’s 529 college savings.
Spreading your payments over a longer period ultimately increases the amount you repay. Rather than repaying a total of $15,580 over 10 years, if you lengthen the repayment period to 15 years, you end up repaying a total of $18,883 because interest accrues over a longer term, even though it’s at the same rate of 9.58%.
But there can also be advantages. For example, investing the difference can give you a bigger return than paying your debt off more quickly if you’re able to score an interest rate significantly below 9.2% — the average rate of return of the stock market over the last 10 years, according to Goldman Sachs data.
Play around with online interest rate calculators and different terms lengths to see the difference between how much you could save or earn with different investing-versus-debt-payoff strategies.
4. Your Credit Score Could Go Up
If you use your debt consolidation loan to pay off credit card balances in addition to your student loans, you could see a boost in your credit score. That’s because part of your score is your credit utilization ratio, how much of your available credit you’re currently using. When you pay off the card balances, it frees up space on those cards, thereby reflecting that you have available rather than maxed-out credit.
Just don’t fill the cards back up or cancel them if you want to retain the higher score. Your credit history, the length of time your accounts have been open, is 15% of your score. So if you close your old accounts, you no longer have the history, and your score could go down.
Likewise, if you fill the cards back up, your score goes down, and the consolidation loan you used to pay off your debt becomes counterproductive since you racked up more debt. So have a strategy in place to avoid making new charges to your credit cards.
Pro tip: Another great way to boost your credit score is to sign up for Experian Boost. It’s free and you’ll get credit for on-time payments on bills like your cell phone and streaming services. Learn more about Experian Boost.
Disadvantages
Despite the few advantages, the drawbacks to consolidating your student loans with your other debts frequently outweigh them.
1. You’ll Likely End Up Paying Back Far More on Your Student Loans
It’s possible to find a better interest rate on a personal loan than the current rate on your credit cards or private student loans. But it’s less likely the rate will be lower than that of your federal student loans.
The interest rates on personal loans range from around 3% to 36%. But the best interest rates on personal loans in 2021 hover around 6%, and you need excellent credit to qualify for the lowest rate.
Further, the best rates are usually variable interest rates, which means they fluctuate with market conditions. So even if your loan starts with an interest rate lower than the current rate on your student loans (which have fixed interest rates), it won’t stay there, especially since the Federal Reserve plans to increase interest rates within the next couple of years, according to CNBC.
Read your loan contract before signing to ensure you’re clear on whether you have a fixed or variable interest rate.
Meanwhile, the federal interest rates on direct loans for the 2021-22 academic year are 3.73% for undergraduates and 5.28% for graduates. If you have PLUS loans, including grad PLUS or parent PLUS loans, the interest rate is 6.28%.
Even the highest-interest-rate federal student loans are on par with the absolute best interest rates offered on personal loans in 2021, which most borrowers don’t qualify for. Remember, the average personal loan interest rate is around 10%.
Thus, it doesn’t make sense to consolidate your federal student loans with your other debt because it most likely means refinancing them at a higher interest rate.
It’s possible you could get a lower interest rate on a personal loan than you’re currently paying on a private student loan, which could have an interest rate as high as 13%. But even then, you’re more likely to find a much better rate with a lender that specializes in student loan refinancing. Two of our favorite companies are LendKey and Earnest.
2. You Could End Up Paying Back More on All Your Loans
Consolidating all your debts together can make them easier to manage. But it’s not always the best debt payoff strategy. It doesn’t allow you to be strategic about paying down each individual debt, which could prolong repayment of all your debt.
That’s especially true if you’re considering consolidating your debt because you can’t manage your monthly bills and want to lower your monthly payments. It can be tempting to choose a lengthy repayment term.
But if you do, a consolidated loan could end up costing you hundreds or thousands more than if you’d left the original debt alone. You’ll repay far more in total because of the interest on the loan.
That may seem like a small price to pay for some relief, but it could end up keeping you in an ongoing cycle of debt. For example, if making loan payments continues to prevent you from building an emergency fund, you might be forced to reach for credit cards again the next time a financial emergency hits.
Do the math to see if it’s worth extending the loan period to reduce your monthly payment. Use an online calculator to play with different loan terms and interest rates and see how they could affect your monthly payment.
3. You May Have to Pay an Origination Fee
On top of interest charges, many debt consolidation loans come with origination fees, one-time amounts taken off the top when you get the loan. The fee ranges from 1% to 8% of the total loan amount.
For example, if your loan is for $10,000 but has a 2% origination fee, you only get $9,800. But you’re still responsible for repaying the entire $10,000 loan.
Not all lenders charge this fee, so you can try to skip lenders that do. However, if you opt to consolidate debt with a personal loan, your primary goal should be the lowest possible interest rate, and you might be able to score a low enough rate with a lender to make this one-time fee worth paying.
If you go with a lender that charges an origination fee, plan to borrow enough for the loan funds to cover the debt you’re consolidating plus the fee.
4. Your Credit Score Could Go Down
Your credit score calculates student loan debt and credit card debt differently. Student loans are installment debt, a one-time loan with a set monthly payment and payoff date. Credit cards are revolving debt, a line of credit you can keep using continuously.
Thus, when you pay off your credit cards with a personal loan, your credit score improves. But if you replace your student loans with your new debt consolidation loan, you’ve just replaced one installment loan with a new larger one.
That could potentially lower your credit score in two ways: First, the loan is new. New debt almost always gives your score a temporary dip. Second, to consolidate all your old debt, it will be a bigger loan. More debt almost always means a lower score.
5. You’ll Lose Access to Student Loan Repayment Options
If you consolidate your federal student loans with a private consolidation loan, you no longer have federal student loans. That means you lose access to all the federal options for deferment and forbearance. You also lose access to all the federal repayment plans, including graduated repayment, extended repayment, and income-driven repayment.
If you’re considering debt consolidation as a way to pay off your debt as quickly as possible, you may think you don’t need these options. But it’s impossible to say what the future holds.
And if you’re considering debt consolidation as a way to lower the monthly payment amount, income-driven repayment might be exactly what you need since it ties your monthly student loan payments to your income.
Plus, income-driven repayment is the gateway to all the student loan forgiveness programs, including the Public Service Loan Forgiveness Program. So if you’re working in a public service job and could potentially have all your student loans forgiven after 10 years, skip converting your federal student loans into private loans.
Even if you consolidate private student loans with a personal loan, you also lose access to private student loan repayment options, borrower protections, and other perks for student loan borrowers.
Although private student loans tend to have far fewer repayment options than federal student loans, they still have options for things like economic hardship deferment, in-school deferment, or the ability to make interest-only payments or low flat-rate payments while you’re in school. Many also have options for cancellation or discharge in the case of death or total and permanent disability.
Plus, the interest on a private student loan is tax-deductible, just as with federal student loans. The same isn’t true of a personal loan.
The Verdict
Although you can do it, consolidating student loan debt with consumer debt is rarely a good idea. The best strategy is to group similar debts. In other words, use a federal direct consolidation loan for your federal student loans, a private refinance loan for your private student loans, and a personal loan for your other debts.
While there could be some advantages to consolidating your student loans and other debts together, there are better options.
A federal direct consolidation loan allows you to combine all your federal loans into a single loan while preserving access to all the federal repayment plans and borrower protections.
And if you have private student loans, a refinance student loan typically gives you a better interest rate and repayment options than a personal loan. To ensure you get the best interest rate and terms possible for you, compare offers from multiple lenders — including interest rates, repayment plans, and borrower perks.
Then, if you’re still interested in consolidating the rest of your debt, you can use a personal loan to do that. In fact, if you opt to consolidate your other debts before refinancing your student loans, it can even increase your odds of approval.
For example, CommonBond looks at the amount of free monthly cash flow when evaluating an application. A lower monthly payment on your debts could give you more cash flow.
Just as with a student loan refinance, use a marketplace like Credible to compare offers from lenders to find the best rate and terms on a personal loan. Credible uses a soft credit inquiry to match you with prequalified offers, so it won’t affect your credit.
That’s especially important if you plan to apply for several consolidation loans at once. Without a comparison tool like Credible, once you submit your final loan applications with your selected lenders, the lenders will make a hard credit inquiry. That causes a temporary drop in your credit score that could affect your ability to apply for more loans. It’s best to compare them beforehand and only submit an official application to one lender.
Final Word
Ultimately, consolidating student loans and other debt together isn’t the most cost-efficient way to manage debt.
But if you do consolidate your debt, watch out for scams. Never pay an organization to consolidate your debts for you. You can find a personal loan on your own, and consolidation through the federal government is always free.
Also know consolidation isn’t the best strategy for everyone, even if you opt to consolidate different debts separately. You may lose benefits on some student loans if you consolidate them. Some alternatives to a debt consolidation loan include credit card balance transfers, credit counseling, debt settlement, negotiating directly with your creditors, and bankruptcy.
Whatever your debt payoff or debt management goals, explore your options to see which is right for you.
