Debt consolidation for recent graduates

If you’ve just finished school and find yourself in debt, take a deep breath—you’re in good company. So many people start this chapter the same way. It’s a season of transition, and that debt is often part of the bigger picture of investing in yourself, building your career, and stepping into adult life.

Paying off that debt can definitely feel overwhelming. Fortunately, debt consolidation could make the process easier. Consolidation involves combining multiple debts using one new loan. This leaves you with just a single payment to make. 

Depending on your type of debt, you may have several options for debt consolidation. Here’s what to know to figure out which options could help your finances. 

Can recent graduates consolidate student loans and credit card debt?

Yes, recent graduates can absolutely consolidate their student debt. You could also consolidate your credit card debt separately, but options for consolidating the two kinds of debt together are limited.

Both the Department of Education and private lenders have options to consolidate student loan debt. You’ll usually want to keep federal student loans within the federal student loan ecosystem so you don’t lose borrower benefits. If you have federal and private student loans, you may not be able to consolidate all your student loans together.

Your options for credit card consolidation will likely be limited to private lenders. You can't consolidate credit card debt through the Department of Education. If you really want to consolidate both types of debt together, one option could be consolidating with a home equity loan.  

Challenges for recent graduates considering debt consolidation

You may face some challenges as a new grad trying to consolidate debt.

The biggest challenge may come with federal student loans. You should only consolidate these with the Department of Education so you keep your important borrower benefits, which may include:

• Flexible deferment and forbearance solutions

• Income-driven repayment plans

• Loan forgiveness options 

Direct Consolidation loans from the Department of Education won’t change your interest rate but they could allow you to combine multiple existing federal student loans. That could make payoff easier.They may also unlock other benefits, like different repayment options. Your new interest rate is a weighted average of the loans you’re consolidating.

You can’t consolidate private student loans or credit cards through the Department of Education. You’d have to go with a private lender. 

You’ll probably need separate private lenders for student loans versus credit cards—and lenders that allow student loan refinancing or consolidation usually limit how much you can borrow. You can usually only borrow the amount of outstanding educational debt, which could defeat the point of consolidation if you were hoping for a single payment.

New grads may have another problem: limited credit history. It’s also natural for recent grads to have salaries that are on the lower side, and often they haven’t held the job for long. These issues could make it harder to get approved. You may also be charged a higher rate if you do get approved, because you’re viewed as a riskier borrower due to your newer financial profile. 

Few new grads are homeowners, but if you do happen to own a home, consolidating using a home equity loan could be an option. A home equity loan is one of the few consolidation options that could be used to consolidate credit cards and student loans in one new loan. 

Debt consolidation options for recent graduates

Recent graduates may have several different debt consolidation options, including: 

• Direct Consolidation Loans. These Department of Education loans are available only for federal student loans.

• Private student loan refinancing. These loans allow you to consolidate one or more private student loans with a new lender. Ideally, your new loan will have a lower interest rate. Private student loan lenders usually allow you to include federal loans in your consolidation loan. That’s probably not your best strategy: you want to keep those valuable borrower protections you get with federal loans.

• Debt consolidation loans. These loans are useful for high-interest credit card debt, and you could borrow more than you need to repay your education loans so you can consolidate other debt, if you qualify. 

• Debt management plans. These plans could help you get on top of credit card debt by working with a credit counselor from a nonprofit credit counseling agency. Once enrolled, they may help negotiate a payment plan with your creditors that could include things like waived fees. You’ll then make payments to the credit counseling agency, and the money is distributed to your creditors.

Pros and cons of debt consolidation for graduates

Consolidation could be the right solution, but like anything, it has pros and cons to consider.

Pros

• Get new repayment terms. Consolidation could let you choose new loan terms to better fit your budget. For example, you may qualify for a lower interest rate.

• Fixed payments. Student loan consolidation loans are generally installment loans with a set monthly payment. 

• Simplify repayment. When you consolidate multiple debts, you end up with just one loan instead of several.

Cons 

• More interest. If you consolidate into a loan with a longer payoff period, you’ll wind up paying more interest. 

• Loss of federal borrower benefits. Consolidating federal student loans with private student lenders outside the Department of Education will mean losing some borrower protections.

• Capitalization cost. When you consolidate a student loan, the unpaid interest is added to the principal balance of your new consolidated loan. This is called capitalization, and it means you’ll pay interest on a higher starting amount. Capitalization applies to Direct Consolidation as well as loans through a private lender.

• Challenging to qualify. You may have a hard time getting approval without a stable income. If your credit score is too new to show much history, you may also be denied.

Debt consolidation mistakes to avoid

If you're going to consolidate your debt, avoid these mistakes:

• Refinance federal student loans into private student loans. This could be a mistake if you don’t consider the borrower benefits you’ll be giving up. 

• Consolidate low- and high-interest debt together. This could raise the rate on low-interest debt.

• Choose a much longer repayment term. This could substantially increase your borrowing costs over time, even if you get a lower rate.

Look at the total cost of the new refinance loan as well as the monthly payments and changes to other loan terms. This could help you decide whether consolidation really makes good sense. 

Best debt consolidation options for recent grads

If you're thinking about consolidating debt, here are a few options:

• Federal student loan consolidation. Using a Direct Consolidation Loan to consolidate existing federal student loan debt means your interest rate won’t change. It will be a weighted average of the consolidated loans. You may qualify regardless of credit or income. You could also unlock new payment options, such as a longer term. A longer repayment time will likely increase the total interest you pay over the life of the loan.

• Personal loans. You could use a personal loan to pay off any kind of debt you want, including student loans and credit card debt. You’ll have to qualify based on credit and income, and it would be good to get a lower rate. Personal loans may not be the best choice for consolidating student loans as they tend to have higher interest rates and be for lower amounts.

• Student loan refinance loans. If you have private student loans, you'll likely need to consolidate using a private lender. Private lenders may also consolidate federal student loans, but you'll typically give up borrower benefits by consolidating federal loans with a private lender. Qualification for private consolidation loans is based on credit and income.

• Debt management plans. Debt management plans from a credit counseling agency could help you get on top of your credit card debt. Most DMPs don't include debt from federal or private student loans.

What's next

If you're still interested in consolidating your debt as a recent grad, here are your next steps. 

• Start looking into consolidation loan options. Research different kinds of loans and lenders to figure out what makes sense. 

• Compare interest rates, terms, and loan benefits.

• Find a new loan at an affordable rate and apply to find out if you’ll get approved so your consolidation can move forward. 

If you do consolidate, then you can start making payments on your new loan and work toward paying off your student loans and stepping more fully into your new financial life as a graduate.