The Golden Rule of Student Loan Consolidation

Michael Lux Blog, Consolidation, Student Loans 5 Comments

If you are considering consolidating your student loans,there are many things to consider.  However, one rule is more important than all the others: Don’t consolidate your federal student loans with your private student loans.  This terrible idea should be avoided by nearly everyone.


In order to understand why combining your federal government loans with your private loans is such a bad idea, you first need to understand the differences between these two types of loans.

Federal Loans

These are the Loans that you get from the government after you complete your FAFSA.  These loans are special because they come with special right guaranteed by law.

These special rights include:
Repayment plans based upon income
– Deferment period for unemployment
Student loan forgiveness programs
– many other protections in the event of your permanent injury or death

Private Loans

The terms of these loans vary greatly from one lender to the next.  One thing that these loans all have in common is that they are nearly impossible to discharge in bankruptcy.

Further Reading: The Sherpa Guide to Private Loan Consolidation

What’s wrong with combining/consolidating these loans?

When you combine your federal loans with your private loans, the new loan ceases to be a federal loan and all the advantages you had with your federal loan are gone.  That means if you get sick or lose your job and find yourself in a difficult financial situation, you are stuck with the harsher terms of your private loan.

If you mistakenly combine loans you could cost yourself thousands in student loan forgiveness.  If the government comes out with a new program that could help you, you will miss out if you combined your loans.

The exception to the rule:

They say there is an exception to every rule and the Golden Rule of Student Loan Consolidation is no different.  If you are 100% certain that you know exactly how much money you will be getting and when you will be getting your money, this exception may work for you.  This exception applies only to the people who care about interest rate and nothing more.

An Example

Let’s say you won the lottery and will be getting $10,000 a month for life.  Even if you don’t have the money today, there is no doubt that you will have the money and you will be able to pay it off.  In that case a private consolidation may help you lower your interest rates an you may be better.

The moral of the story

If there is even the slightest bit of uncertainty in your financial future, you shouldn’t combine your private student loans with your federal student loans.  Follow the Golden Rule of Student Loan Consolidation and you could save yourself thousands.