To think practically when you are under a lot of debt is tricky, and understanding the Pros and Cons of Consolidating Student Loans might get trickier.
So, this article not only offers you an insight of the pros and cons but also guides you with all of the various aspects that you need to take care of before you apply for Student Loan Consolidation.
It’s better to start by understanding the basic meaning and then moving ahead.
What is Student Loan Consolidation?
It’s common to have a mix of Federal and Private Loan after school. You can easily have multiple loan services, due dates and minimum payments.
Keeping a track of what you owe every month and when it’s due can be very confusing.
In such cases, deciding to consolidate student loans could help you manage your debt more efficiently.
To know more about the Best Banks for Consolidating Student Loans in 2019, please visit this article.
To put it simply: Student Loan Consolidation is One Loan, One Lender, One Payment.
It is important to remember that there are different types of loans and that there is a huge difference between:
Federal Loans(those issued by the U.S. government) and
Private Loans (those issued by a bank, credit union, or other lending institution).
And both Federal and Private have their own pros and cons, but before discovering that let’s discuss the Pros and Cons of Consolidating Student Loans in general:
Lowers your Monthly Payment
May Increase your total interest Payment
Combines Multiple Federal Loans into One
Increases your Principal Amount
Converts Variable to Fixed Interest Rates
You might lose the benefit of Loan Forgiveness
Provides Income-driven Repayment Plans
Difficult to pay off loans with Higher Interest Rates
Helps in avoiding Default
Some Consolidated loans have Variable Rates so, the per annum or monthly payable amount is not fixed
Provides you option for Deferment and Forbearance
Makes it easy to Repay
Pros of Consolidating Student Loans:
Some reasons to make you realize that Consolidating your Federal Student Loan is a better option.
1. Lowers your Monthly Payment
Different loan consolidations come up with different terms and conditions, some loans may be on fixed interest rate while some might be on a variable.
So, consolidating all of the loans into one single loan will help in minimizing your monthly payment.
And also, as consolidation gives you a longer term for repayment it makes it easier for your pocket to bear the repayment amount.
But before consolidation, you need to make sure that you discuss the same with the lender in depth as you don’t want to end up paying a higher amount than the already existing one.
2. Combines Multiple Federal Loans into One
Consolidation can help you a lot if you have different student loans from various lenders with different due dates of payment.
Consolidation makes managing your student loans easier because it replaces all the multiple loans with one simple loan.
This simply means that instead of managing multiple payment reminders, you only have to focus on a single one.
3. Converts Variable Interest Rates to Fixed Interest Rates
Variable interest rates are always the lesser considered ones because the fluctuations in Interest amount according to the market condition might prove to be a huge burden on your pocket.
All of the Variable, as well as Fixed interest rates, get converted into a single Fixed Interest Rate after consolidation.
So, what you pay next month or next year will be the same as the current payment, giving you no shock in the future.
With a Fixed Interest Rate, you can easily plan about saving money and to know more about How to Save Money please check this link.
4. Provides Income-driven Repayment Plans
Federal Direct Loans provide you access to income-driven repayment plans, which can help you in lowering your monthly payments and offer some powerful student loan forgiveness options.
Some of the consolidation plans may offer you the option to choose flexible repayment terms.
But other loans like Stafford Loans, Federal PLUS Loans, and Perkins Loans, do not give you access to these income-driven repayment plans.
In Income-driven repayment plan, you will start off making lower monthly payments, which will increase gradually over a period of time.
5. It can help you in avoiding Default
Default is a major concern for the borrowers who are unable to make their monthly payments as the repercussions of the same are extremely harmful.
Default in making timely payments can lead to bad credit score which makes it more difficult for you to qualify for other types of credits.
6. Consolidation Gives you more options for Deferment
Student Loan Deferment and Forbearance are two extremely powerful tools for borrowers who are unable to make their monthly payments.
But there is a limit to how long you can defer your student loan payments which is typically 3 years.
So, if you have already used all of your deferment /forbearance time, then consolidating your student loan will reset the clock and provide you with the option of placing your new consolidation loan into deferment /forbearance.
Cons of Consolidating Student Loans:
Here are some of the reasons to make you think otherwise and not opt for Student Loan Consolidation.
Afterall you need to understand all of the Cons before finally deciding to go ahead with Student Loan Consolidation.
1. Might increase your total Interest payment
If you get your student loan consolidated for a longer term then it means that you will have to pay the interest amount for a longer duration.
So, consolidating your student loan might end up increasing your payment amount.
2. Consolidation may add to your Principal
If any of the student loans that you are consolidating have an outstanding interest then that interest will become a part of your new consolidation loan.
This means that you will be paying interest on a higher principal than your original loan amount.
To avoid this situation, you can simply pay off the outstanding interest before you get your student loan consolidated.
3. You might lose certain Benefits
If you get your student loan consolidated then you might end up losing the benefit of Student Loan Cancellation Option, Interest Rate Reductions, Principal Rebates and more.
If you decide to combine all of your loans, you may lose certain borrower benefits because, with your original federal student loans, you may qualify for loan forgiveness.
Under this program, a portion or the entire loan amount is forgiven as long as you fulfill certain conditions provided by the lender.
So, it is advised that before opting for Consolidation please have a thorough discussion with your lender.
This point is not applicable for all and it will depend on the exact type of Student Loans that you are consolidating.
4. Difficult to pay off loans with Higher Interest Rates
Different loan amounts at least gave you an opportunity of getting your loan paid off for smaller amount first and then leaving the bigger amounts for later.
But after consolidation, all of the loans become one single loan leaving you to pay off a higher amount on monthly basis.
5. Some Consolidated loans have Variable Rates
The risky part about having Variable interest rates is that according to the market scenario the rates fluctuate and you might have to pay a higher interest amount in the future.
Not having a fixed amount to pay every month will hold you back from saving money.
Consolidating Federal Loans
Hopefully, we all did try to take help from Financial Institutions in college and specifically Federal Student Loans (Before we had to opt for Private Loans)
So, if you also took help then you may want to learn How to Specifically Consolidate these Federal Loans.
The Direct Consolidation Loan allows you to consolidate multiple federal student loans into one.
And to understand it better, let’s discuss the Pros and Cons of Federal Loans.
Pros of Consolidating Federal Loans
There are various benefits that come with Consolidating Federal Loans:
1. They lower your Payments
Consolidating your Federal Loans can lower your monthly payments by providing you a term of up to 30 years to repay your loans.
2. They give you Fixed Interest Rates
The interest rate on a Direct Consolidation Loan is a Fixed Interest Rate, which means that it will remain the same for the entire duration of the loan.
3. They Renew Eligibility for Benefits
Once your Federal Loan gets Consolidated, it resets the 3-year clock on Deferments and Forbearances.
So, if you have previously used your allotted time on Deferments then you will be eligible for them again.
The same is forbearance wherein you will be able to temporarily postpone your student loan payments.
Cons of Consolidating Federal Loans
There might be various drawbacks that you need to understand before choosing to Consolidate Federal Loans:
1. You might Pay more Overall
If you lower your monthly payments and increase your term to 30 years then this means that you will have to pay more interest amount on your student loan consolidation.
2. Borrowers benefits from the original loan will be lost
This benefit can include Interest Rate Discounts and Principal Rebates.
You might lose the benefit on a flexible payment plan and also you may no longer be eligible for Student Loan Forgiveness.
3. You may Lose Grace Period
When you decide to consolidate your loan and at that time if you are in your grace period then you might lose the rest of your grace period.
Federal Loans Eligible for Consolidation
Mentioned below are the various Federal Loans which are eligible for Consolidation:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Federal Perkins Loans
- Federal Nursing Loans
- Supplemental Loans for Students
- Health Education Assistance Loans
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- Direct PLUS Loans
- PLUS Loans from the Federal Family Education Loan (FFEL) Program
Consolidating Private Loans
You can choose to consolidate all of your Private Student Loans into one Loan and these loans are managed by Private lending institutions such as a Bank, Credit Union etc.
These private student loans are not managed or provided by the Government.
All the Interest Rates on Private Consolidation Loans are based on your Credit and Market Condition.
This means that your new interest rate will depend on your current Credit Score (So, you need to maintain your credit score, if you want to get a lower interest rate)
All the rules and charges along with the Interest Rate on your Loan depend upon the Financial Institution that you choose.
In order to get a proper insight of the same and to compare different Interest Rates, do check out this article.
Private Student Loans mostly work on Variable Interest Rate. So, the amount that you will have to repay might keep on changing.
What to Keep in Mind before Consolidating Student Loan?
Well apart from understanding the various pros and cons of consolidating student loans you simply need to understand that:
You need to take time and analyze how much you owe and to whom.
- Which companies do you make payment to every month?
- What Interest Rate you’re operating with?
- And, How long will it take for you to pay off the loan at the current interest rate you’re operating with?
Only after getting the answers to the previous 3 questions you need to go ahead with the options available for you to deal with your debts.
Remember, Consolidation is not the ONLY option for you to get out of debt, and it might not be required in your case.
There are various repayment assistance options which include Deferments, Extensions, Forbearance, and Hardship to help you in repaying your loans.
So, if you think that you’re missing out on any point then do give this read a second look, Analyse, Calculate, Think and only then make your FINAL call.
There is a difference between Private Loan Consolidation and Federal Loan Consolidation and the rules that they follow should suit your situation.
There might be various hidden aspects of different lending institutions which you need to discuss in depth before going ahead with that Financial institution.