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To Consolidate or Not to Consolidate Your Student Loan

As of June 30, 2021, student loan debt in the United States rose to $1.73 trillion and is growing six times faster than the nation’s economy. On average, 43.2 million borrowers carry debt of $39,351 each.

If you fall into this category, consolidating your federal student loans may be an effective strategy. Here are four planning tips to help you make your decision:

  1. Review your cash flow and debt management planning. 

    If you are paying off a student loan, chances are that debt management should be a top priority of your financial plan. So,  consider devising a monthly budget that allows you to pay your debt off as quickly as possible. Expenses fall under two categories: non-discretionary and discretionary. Non-discretionary expenses include items that are necessary to maintain your standard of living, such as a mortgage (or rent), groceries and insurance. Discretionary expenses are expenditures that you have complete control of, such as travel, gifts and recreation. A budget review may enable you to reduce some discretionary expenses to pay off your student loans more quickly. Also, if you have any surplus cash after paying your monthly bills, consider earmarking a portion to pay off your student loans. In sum, consider adopting a systematic repayment plan that is feasible and attainable.

  2. Review your student loan payoff options. 

    While some lending institutions offer private student loans, federal student loans include terms and conditions set by law (Direct Loans are from the William D. Ford Federal Direct Loan Program). They also provide lower fixed interest rates, repayment options and income-driven repayment plans not typically offered with private loans. For Direct Loans disbursed on or after July 1, 2021, and before July 1, 2022, the following interest rates apply:

    • Direct loans (subsidized and unsubsidized) for undergraduates: 3.73%
    • Direct loans (unsubsidized) for graduates or professionals: 5.28%
    • Direct PLUS loans for parents, graduates or professionals: 6.28%
  3. The Standard Repayment Plan enables you to pay off your federal student loan with a fixed payment within ten years. You can also choose other repayment plans:

    • Graduated Repayment Plan
    • Extended Repayment Plan
    • Revised Payment as You Earn (REPAYE)
    • Pay as You Earn (PAYE)
    • Income-Based Repayment Plan (IBR)
    • Income-Contingent Repayment Plan (ICR)
    • Income-Sensitive Repayment Plan

    Choosing the repayment plan that fits your financial situation may seem overwhelming. Fortunately, the federal student loan program provides a loan servicer that handles the billing and other services. This person contacts you after your first payment is made. The loan servicer can review your repayment options and determine if you qualify for an income-driven repayment plan. This service is free, you avoid paying for federal student loan assistance. To evaluate your repayment plan options, visit the Loan Simulator.

  4. Consider the pros and cons of the CARES Act student loan provisions.

    Enacted into law because of the COVID-19 emergency, the CARES Act allows you to suspend your monthly student loan payments, effective March 13, 2020, until at least September 30, 2021. However, you can still make your payments. Given the impact of interest and potential loan forgiveness, you may want to consider exploring other options before electing deferment or forbearance. Your loan servicer can assist you in determining if another repayment plan might be more suitable.

    To learn more, visit

  5. With multiple loans, consider a Direct Consolidation Loan.

    If you have separate loans, loan consolidation has several advantages:

    • There are no fees or charges. If a private company offers to help you apply for a Direct Consolidation Loan for a fee, be aware that these companies have no affiliation with the U.S. Department of Education (ED) or ED’s consolidation loan servicers. The process is easy and free.
    • You make one payment with just one monthly bill instead of multiple payments to different loan servicers.
    • You can lower your monthly payment by extending the period of your loan (up to thirty years).
    • If you consolidate loans other than (Federal) Direct loans, you may gain access to additional income-driven repayment plan options and Public Service Loan Forgiveness (PSLF).
    • You can switch from variable-rate loans to a fixed interest rate loan.
    • The interest rate of a consolidated loan is based on the weighted average of your student loans, rounded up to the nearest eight of a percent. While you may be able to reduce your interest rate, there are no caps on the weighted interest rate.

      While reasons for loan consolidation seem quite compelling, consider the following caveats:

    • With a lengthened repayment period (from 10 to 30 years), the total cost of your loan usually increases.
    • Any outstanding interest of your current loans becomes part of the loan principal.
    • You may lose benefits of your current loans, such as loan cancellation.
    • Consolidating your loans results in losing credit for any payments made toward income-driven repayment plan forgiveness or Public Service Loan Forgiveness.

To learn more, visit

In closing, the federal government has gone to great lengths to lessen the burden of student loan debt on our economy, but the myriad of choices creates greater complexities in your decision-making. For this reason, consider consulting a CERTIFIED FINANCIAL PLANNERTM professional to help you develop a holistic financial plan that can address your specific circumstances.

Disclosure: Registered Representative of and Securities and Investment Advisory Services offered through Cetera Advisor Networks, LLC. Registered Broker Dealer, Member FINRA/SIPC. Reid Financial Consulting, Inc. and Cetera Advisor Networks are unaffiliated. Although the information is based on reliable sources, the recommendations are general in nature. Consult your financial planner for more specific advice.

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