Student loan consolidation may not be the silver bullet solution that it used to be and can be quite daunting. However, consolidation can still offer some benefits depending on your situation.
First of all, student loan consolidation can simplify your finances. When you consolidate your student loans, you roll them into one bigger loan. That means you have just one loan to keep track of and pay off instead of several ones and that helps in reducing late or missed payments. There’s also the possibility of securing a lower or fixed student loan consolidation rate.
Key points on student loan consolidation
1. Here are some major points to keep in mind. One of the best reasons to consolidate student loans is that it lets you stay organized. You now make one payment on one big loan instead of five separate payments on five smaller loans. This will help you prevent missed or late payments which makes consolidating your student loans worth it.
2. Consolidating federal student loans issued after 2006 with a federal student consolidation loan won’t save you any money because your loans already have fixed rates. You might be able to lower your monthly payments by choosing a longer repayment term, but this will cost you more in interest in the long run.
3. Consolidating your student loans with a private student loan consolidation company can potentially save you more depending on current interest rates. With private student loan consolidation, you’ll need good credit to qualify for a good interest rate. A variable rate loan will have a lower interest rate in the beginning, but interest rate could rise over time. A fixed rate consolidation loan may be higher to start with but you won’t have to worry about the interest rate increase and costing you more later on.
4. In general, steer clear of consolidating federal student loans with a private lending company unless you get an unbeatable rate. Federal student loans have many valuable fringe benefits that private loans simply don’t offer.
Types of student loan consolidation
Federal student loan consolidation
Federal consolidation loans are, as the name suggests, federal student loans. You can consolidate almost any federal student loan using the direct consolidation loan program. However, you can’t include any loans from private lending companies and you can’t include any PLUS loans borrowed by your parents on your behalf.
Private student loan consolidation
Various private lenders also offer private student loan consolidation. Some even allow you to include federal student loans in a private consolidation loan.
If you don’t have a long or strong credit history, as is the case with many students and recent graduates, you may not qualify for private student loan consolidation. You might be required to get a co-signer with better credit to secure a better interest rate.
Pros and cons of student loan consolidation
Student loan consolidation PROS
- Depending on how many different loans you’re juggling with, keeping track of just one bill and payment due date instead of several can be a big relief, especially if you’re a recent student who’s not quite used to the monthly grind of paying bills and managing finances.
- You may get to choose a repayment plan that’s the best fit for your financial situation. For example, federal student consolidation loans offer several payment plans that take your income into account.
- Lastly, consolidating may leave you with a total monthly payment that’s lower than what you were paying for your loans separately. In some cases, it can also save you money in the long run though that’s an unlikely scenario with federal consolidation.
Student loan consolidation CONS
- The major downside of student loan consolidation is that you may end up paying more money over the life of your loan if you decide on a longer repayment schedule to make your monthly payments more manageable.
- As you may gain repayment plan options with consolidation loans, you may lose access to other repayment plans benefits such as interest rate discounts or loan forgiveness, forbearance and deferment options. This can be a concern especially if you’re consolidating a federal student loan with a private lending company as federal loans are typically set up with far better borrower protection than private loans.
- Consolidating your student loans may often mean that you’re locking in your interest rate. This can either work for or against you, depending on the current interest rate and whether your loans already have fixed rates or not. However, given that you can consolidate only once, it is a factor that’s worth careful consideration.
It’s safe to say that the days when you could expect to save a significant amount of money by consolidating your student loans with a lower interest rate are gone. However, there’re still many reasons to consolidate even though it may cost more in the long run. There are advantages such as locking in interest rates on private loans, simplifying payments, extending loan term to lower monthly payments and having more financial breathing room each month.