What Is a Federal Consolidation Loan, and How Could It Help You Manage Debt?


Many people who are in debt consider consolidation loans to pay them off. There are pros and cons to this financial move, and for some people, it’s the right choice. For others, the downsides could outweigh the benefits. Let’s take a look at what consolidation means, and whether it’s the right call for your specific situation.

What Is Debt Consolidation?

A consolidation loan is a loan that is granted by a third party so that you can pay off your debts. Then, you pay back that loan. For you, the only difference is that you’re now paying one bill, instead of several. For the companies you owed money to, they have the money they were owed and are happy. For the consolidation lender, you’re now giving them money instead of their competitors. So, the lenders involved are usually all happy with the arrangement. The big question is, does this help you out?

Pros of Consolidation

If you have a variety of debts, like student loan debt, and you get a federal consolidation loan, there are some upsides. For one thing, you now have a much simpler bill to pay. Rather than remembering which companies need your money, and when, you just pay your one student loan bill. Another benefit is that you can switch any variable-rate loans you have with private lenders to a fixed-rate loan with the federal government.

The federal government also allows for longer repayment periods. As such, consolidation can greatly lower your monthly bills, at the cost of extending the length of time you’ll spend paying off the debt.

Cons of Consolidation

However, for some people, the drawbacks outweigh the benefits. With a longer repayment plan, you could end up paying more over the years than if you took the shorter payment with higher monthly minimums. Likewise, the outstanding interest on your loans now becomes the principal of your consolidated debts. This, in turn, can lead to much more interest accruing over the years.

Other considerations to take into account are the unique benefits from your private loans. Some lenders extend breaks or discounts based on criteria like the length of the repayment or on-time payments. When you consolidate your debts, you’re now paying a different entity. As such, it’s unlikely those benefits will still be in play.

Your best bet is to run the numbers yourself and see which one of these options will save you the most money. Sometimes, consolidation is a great fit for your lifestyle, due to the lower monthly payments. Other times, the longer repayment period and the accruing interest make it a bad value prospect.