The biggest misconception out there is that consolidating your student loans will lower your interest rate. After consolidating, your new interest rate is the weighted average of all the loans you chose to consolidate.
In other words, your combined interest rate will be exactly the same as it was before.
In the past, people often had to deal with multiple loan servicers for multiple federal student loans.That meant multiple bills to track and people to pay in order to keep everything in order.One of the main points of confusion is that the word consolidation is often used to mean EITHER consolidation OR refinancing.But those are two very different things with very different pros and cons.You either received a Direct loan directly from the federal government, or a FFEL loan from a private company.
Only Direct federal loans qualify for the best income-driven repayment plans like Pay As You Earn and Income-Based Repayment.If you borrowed before July 1, 2006, your federal student loans may have a variable interest rate that changes every year.And while it’s nice when your interest rate decreases, the risk is that it will eventually increase and you’ll be stuck with a higher monthly payment than you’d like. By consolidating those variable rate loans, you can lock in a fixed interest rate so that you know what you’re going to pay each month for the life of the loan.It also meant that consolidation was appealing for the simple fact that it made things easier.With only one servicer to pay, life got a lot less complicated. You can typically handle all of your federal student loans from the same online login, so consolidating usually doesn’t make things any easier.With respect to student loans, consolidation specifically refers to the Federal Direct Consolidation Loan program, which essentially allows you to turn one or more federal student loans into a different kind of federal student loan.