Consolidate Student Loans
11 Reasons to Consolidate Student Loans
Well, the day has finally arrived! Four long years of intense study, and ten or eleven student loans of varying terms, rates, and monthly payments, and you are a college graduate. You wonder how in the world you will be able to manage all of these loans. You add up the balances of each and they total $33,000.00, which is just about the average debt for a college graduate. That fact doesn’t help much, but then you read further and see the term consolidate student loans.
You’ve just graduated, so you have six months until repayment on your federal loans begin. Whew, now I have time to find a job and get my eleven loans consolidated into one loan with a lower monthly payment, and hopefully a lower rate of interest. Most students aren’t this lucky. Many have a combination of private and federal loans, and those can’t be consolidated.
[bctt tweet=”Be very careful when you consolidate different types of student loans. See why…” username=”HBSMoneyTips”]
Trying to manage that many loans with different payment due dates can be difficult and is one of the reasons so many student loans are in default. That’s why it’s so attractive to consolidate student loans, BUT, there are some issues you need to be aware of.
By definition, to consolidate student loans means one lender with one monthly payment. Very simple concept, but if you’re not careful, you might be paying more in the long run. There are good and bad points when you consolidate student loans, and if you don’t fully understand them, you will get burned.
The Pros of Consolidating Student Loans
- One monthly payment when you combine all of your federal loans
- Your new consolidated loan will have just one lender to deal with
- A fixed rate of interest. Your present loans probably have all different interest rates
- When you consolidate student loans, your interest rate is fixed for the term of the loan. The new interest rate is determined by averaging the rates on all of the combined loans and rounding up the average to the nearest one eighth of one percent.
- A lower monthly payment. When you consolidate student loans, there are a number of different repayment plans. Most of the plans will extend the loan term out to 10. 15, 20, and even 30 years. Usually the longer the term, the lower the monthly payment, which helps the borrower when just starting out in a career.
- It’s possible to get the interest rate reduced further and this will also lower the monthly payment even more.
- There are multiple repayment plans available and the borrower can change at any time. The repayment plans are generous. A standard plan is 10 years and the extended plan is 25 years. There is also a graduated plan where the borrower starts low and then it increases every two years between 10 and 20 years. There is also a plan that is income based which generally is 10% to 20% of the borrower’s discretionary income.
- Deferment and forbearance options are available when you consolidate student loans. Since a federal loan being consolidated is considered a new loan, the clock is restarted for deferment and forbearance up to three years.
- If unable to pay the loan because of job loss, the borrower is eligible to apply for a hardship deferment and delay repayment for up to three years.
- When you consolidate student loans, there is no minimum or maximum loan amount to qualify.
- Having just one lender will make it easy to manage the loan each month.
There are many good points in consolidating a student loan, but there are also some cons as follows:
The Cons of Consolidating Student Loans
- No private loans can be consolidated with the federal loans. You can sometimes find a private lender that will allow you to consolidate both types of loans, but usually at a higher rate of interest.
- You can lose benefits. If you consolidate a Perkins loan as an example, there are cancellation benefits that you may be eligible for, and would lose. The benefits for firefighters, police and teachers who are eligible for 100% cancellation would be gone with a consolidation.
- Grace period gone. The borrower usually has six months until student loan repayment begins. When you consolidate student loans, that grace period is gone. After your loan consolidation is approved, repayment generally begins in two months.
- Certain lender benefits may be gone. These apply if the borrower meets certain conditions.
- Can consolidate loans only once. If interest rates were to fall, you’re committed to the rate you agreed to when you consolidated your loans.
- If you’re consolidating student loans ONLY because you have many loans & can’t manage them, you can set up an automatic debit to your checking account and not have to bother with them.
The only requirement that you need to meet when you consolidate student loans is to be sure you’re saving money. If you’re careful and understand what you could lose in the benefits area, you should be able to get a lower rate of interest as well as a lower monthly payment.
As your income increases, it’s a good idea to pay extra principal and repay your loan faster. When you consolidate student loans, you don’t want to be repaying them for the rest of your working years.