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The Pros and Cons of Student Loan Consolidation

Scott Bilker Scott Bilker is the founder of DebtSmart.com and author of the best-selling books, Talk Your Way Out of Credit Card DebtCredit Card and Debt Management, and How to be more Credit Card and Debt Smart. Receive the 5-Year Loan Spreadsheet when you subscribe to his email newsletter.

If you’ve begun to feel overwhelmed by the pressure of student loans, fear not! You’re not alone. Thousands of student loans are taken out every year, and many students are feeling the heat in the same way you are. Payments can be in the hundreds every month, and if your entry-level job isn’t allowing you to make them, or you haven’t yet found a job at all, that’s a pretty steep number.

You might have your degree in hand, but finding a job with it is an entirely different story.  With such a big portion of your check going toward such debt, perhaps the thought of consolidating has been on your mind.  If you’ve considered refinancing and consolidating your student loans but aren’t sure which way to go, or how to start, don’t worry. There are a lot of private consolidation products available. Plenty of people have those questions, too. Here, for easy understanding: the pros and cons no one talks about when it comes to consolidating your student loans.

What to Know Before You Start:

  • According to the Federal Student Aid office, students are eligible for consolidation once they’ve graduated, left the school, or have dropped to part time status or lower.
  • You cannot consolidate private and federal loans into a federally issued Direct Consolidated Loan, but private lenders may let you consolidate both federal and private loans into one. SoFi, the largest student loan-refinancing lender, allows borrowers to consolidate both federal and private educational debt. SoFi even offers a $200 cash bonus if you refinance!
  • Beware of scams! People having financial difficulties often fall prey to predatory loan lenders without double-checking that they are legitimate. Forbes notes that a sure fire way to tell if someone is scamming you is if they start mentioning “processing fees,” “administrative fees,” or “elimination of all debt.” This article from LendEDU lists all of the legitimate student loan refinancing and consolidation lenders.

The Pros:

These are the good things that come with consolidating your multiple loans into just one payment each month:

  • A lower interest rate: A lower rates means more money staying in your pocket over the course of your loan, rather than adding more money into the pocket of your loan provider! A lower rate will also allow you take that that money saved in interest and put it toward paying off your loan premiums instead! Financial experts do warn, however, to be wary of going with a variable interest rate, as the rate might be low now, but there’s no guarantee how high that rate will go in the future. Instead, you should…
  • Establish a fixed-rate loan: Federal loans are typically at a fixed rate already, but private loans can be either variable interest or fixed-rate. Consolidating your loans allows you to change the entire sum to a fixed-rate interest rate. Fixed-rate loans will stay the same rate throughout the life of the loan, so you’ll never be surprised at a hike in rate.
  • A lower monthly payment: This is probably the number one reason most students and graduates consolidate their loans: their payments are simply too high for them to keep up with! As you move forward consolidating your student loans and extending the length of the loan term, your monthly payments will be lower.  This certainly helps you to be able to out and reduces the amount of stress in your life.
  • You only have to make payment to one loan provider. Many college graduates have a handful or more of loan providers, making it a hassle each month when making payments. Consolidating the student loans into one loan makes it easy to write one check each month and not have to worry about a lot of different due dates.
  • Flexible repayment terms. There may be a loan consolidation plan that will allow flexible repayment terms, which means that your student loan monthly payment will be based upon how much money you’re earning at the time. As you make more money through the years, your monthly payment will increase accordingly. This helps you out if you start out in a job where you are getting an entry-level salary.
  • Release you cosigner: When taking out student loans, most students are ineligible for loan approval without a cosigner, usually their parents or guardians. If that cosigner wishes to be taken off of the loan, they can do so when you consolidate.

The Cons:

The downsides and difficulties that come as a result of consolidating you student loans:

  • You may be close to paying off your loan: If you’ve managed the majority of your payments, but only have a few years remaining on your loan, consolidation may be more hassle than it’s worth. As long as you can continue to make the payments, it may be best to leave the loans as they are.
  • It can cost more long term: Consolidating your loans is definitely a good thing, if you’re looking for a short term solution, but be cognizant of the fact that it may end up costing you more over time and in the long run. You may extend the life of the loan by 10 to 20 years when you consolidate, which costs you less each month, but ends up adding tens of thousands of dollars in interest payments over the years.
  • Orientation Fees: When you refinance a loan, your bank may charge you an orientation fee of anywhere from 1 to 2 percent. That means, if you’re refinancing a $50,000 loan, you may be paying $500 extra in one percent orientation fees. This can obviously get up there in numbers if you owe a lot in student loans.
  • You forfeit other repayment options: Other options can include loan deferment, grace periods, and income based repayment plans. If you think one of these options might be a better fit for you, consolidating might not be necessary!

As you think about whether consolidating is for you, beware of those that will try to scam you, as there are some companies out there who will charge you money for helping you consolidate your loans. If someone tells you they can help you have your debt forgiven or if they throw a lot of fees your way, take caution. They are trying to scam you.

Consolidating student loans certainly benefits some individuals who have high interest rates and a lot of student loan debt.  If you’re contemplating this, take the time to do your research on the matter and don’t hesitate to call an expert.  The U.S. Department of Education website has a lot of information on loan repayment plans and if you have any questions, give them a call. You may also call your college financial aid department for some direction. It’s wise to take the initiative to see what all your options are before making a decision, as in some situations, consolidating may be your best interest and in others, it may not.  Do what will save you the most money over the long haul.

This entry was posted in Student Loans. Bookmark the permalink. Read more articles by Scott Bilker. (Also see articles by all authors and articles in all categories.)



Facebook Comments

  • Blen Butterson

    Direct Consolidation actually doesn’t result in a lower interest rate. I think it’s important to be aware of the difference between Direct Consolidation (through the government) and refinance – through a private lender.

    Most of the student loan scams aren’t lenders either – they are companies posing as student loan specialists who charge to help people fill out the paperwork for free programs like IBR and Direct Consolidation.

    Also, it may actually be necessary to go through Direct Consolidation for some loan types to qualify for IBR, or Public Service Loan Forgiveness. Direct Consolidation almost never makes someone ineligible for federal options.

    Refinancing with a private lender does convert a federal loan into a private loan and therefore takes away any federal loan options, however.

 
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