Student Loan Consolidation

What is Student Loan Consolidation?

By definition student loan consolidation is the mechanism by which a borrower consolidates all his current student loans by taking a new loan to repay them. In other words, instead of paying EMI for multiple loans that a student may have taken for his studies, he now has only one loan to pay back.

What is a Student Loan?

To study in a college, a student needs money to pay fees and meet additional expenses like buying books and paying for boarding and lodging. Meritorious students get scholarships. Those who are not eligible for financial aid, raise their funds with a loan being the most common source for the same.

Types of Student Loans

  1. Federal Student Loan

A majority of the students avail of the federal student loans which are given directly by the government. They come with a limit to how much a student can take in one academic year and are directly supervised and managed by the state department of education and the Congress. Similarly, all the important terms are set by them. Moreover, among all the conditions set, the most important is that these loans offer a fixed rate of interest. In addition, in case of default, the federal government is empowered to recover the due amount by way of tax refunds and by off-setting state benefits.

  • Given directly by the US government.
  • Regulated by the Congress and department of Education.
  • Fixed-rate of interest.
  • Strict rules to recover the loan in case of default. For instance, the government can off-set state benefits if the loan is not repaid on time.
  1. Private Student Loan

Private lenders like banks and financial institutions offer private student loans. They set their terms and conditions, which vary from lender to lender.

  • Given by private lenders.
  • Terms and conditions vary.
  • Rate of interest can be variable or fixed depending upon the lender.

Who is Eligible to Consolidate Student Loan?

Not everyone can consolidate a student loan. There are certain criteria a borrower must fulfill to avail of this option.

  • The borrower should have finished his studies or pursuing a part-time course.
  • Good credit history.
  • Minimum loan balance or outstanding as demanded by the lender.
  • Loans which require consolidation should be in the name of the individual only.

Advantages of Student Loan Consolidation

  • It helps a person to plan his payout systematically.
  • The borrower can extend his repayment tenure with his new loan, thereby giving himself more time to arrange his finances.
  • Lenders also give the option to change from an existing variable rate of interest linked to market fluctuations to a fixed interest payout. In other words, they allow a person to know exactly how much he or she will have to shell out each month.
  • Link the repayment plan to income accrued from employment.

Disadvantages of Student Loan Consolidation

  • In all likelihood, you will end up paying more since even though the interest may be lower than the existing loans, the repayment tenure will be longer.
  • Therefore, with an increase in tenure, you will remain in debt longer.
  • With a larger loan against your name, the credit balance reduces, which could be a problem when you apply for a new loan for some other purpose, like buying a house.
  • Some lenders demand prepayment penalties if you close the account before the end of its scheduled tenure.


In conclusion, borrowers who have taken a student loan to complete their college and higher education have the choice to opt for a student loan consolidation. But like all loan consolidations here too it is advantageous only if the borrower shows discipline in repaying it.