Should I Consolidate My Student Loans?
If the rate of interest and the amount of payments is more favorable to your budget than your current arrangements, student loan debt consolidation can be a very good choice. While this may seem quite straightforward and positive, there are actually quite a few things to consider before consolidating student loans.
In this article, we will discuss these considerations. If you are asking yourself, "Should I consolidate my student loans?" you have come to the right place! Read on to learn more.
SEE ALSO: How To Pay Student Loans Fast
It is quite possible these days to graduate from college with a loan burden that will follow you for the rest of your life.
As a matter of fact, approximately 70% of students graduating from public colleges and private nonprofit colleges finish school carrying a debt of about $30,000 and step into one of the most challenging job markets we've had since the Great Depression.
To make matters worse, student loan repayment plans are often extremely burdensome with high interest rates and high monthly payments. If you have multiple student loans, you may be wondering if student loan consolidation would be a good idea for you.
When you go through the process of consolidating your student loans, instead of having multiple small loans with various interest rates, you will end up with one large loan and a single interest rate.
Are You Eligible?
There are a few criteria for eligibility that you must meet. They are:
- You must be out of school or enrolled less than part-time.
- You must have a solid history of repayment and not be in default.
- You must be making your current loan payments in a timely manner or you must be within your loans’ grace period(s).
- You must owe a minimum of $5000-$7500 in student loans for private consolidation. This is not true of loans that are consolidated using the "Federal Direct Consolidation Loan Program".
Can All Student Loans Be Consolidated Into One?
If you have many student loans of different kinds, it is certainly possible to bundle like kinds together into separate consolidation loans to reduce the number of payments you must make monthly and improve your terms and interest.
- Unfortunately, you cannot mix and match even using the best student loan consolidation programs. Private and federal loans (example Fedloans) cannot be consolidated with one another.
- Loans in your name cannot be consolidated with loans in your parents' names.
Positive Points About Student Loan Consolidation
There are number of very good reasons why consolidating your student loans makes good sense. Among them are the fact that refinancing offers an opportunity to extend the length of time you have to pay your loan and/or get a more favorable payment plan.
Here are the choices you may be offered:
1. Extend the length of time you have to pay from as little as 10 years to as much as 30 depending upon the balance left on your loan.
2. Switch to graduated repayment which lets you start out with lower monthly payments that increase gradually over the first two years.
3. Change to an income contingent plan that determines the amount you must repay monthly based upon your current income along with the total amount of outstanding debt you still have. This will mean that your payment amount will change from time to time throughout the life of the loan.
Additional benefits of refinancing include:
- You may get borrower benefits such as discounted interest rates when you have payments automatically deducted from your checking or savings account.
- Bill paying is quicker and easier with just one bill.
- You may be able to get a lower interest rate.
- You may be able to get a fixed rate loan.
- You will have more money to live on.
- Your loan payments will be lower.
Possible Negative Points About Student Loan Consolidation
You must carefully examine any consolidation loan you are considering because there may be hidden negatives. Among them are:
- A fixed interest rate can be a negative if interest rates drop because you can only refinance your student loans once, so you will be stuck with a high rate of interest.
- If you consolidate your loans during their initial grace periods, you will naturally lose those grace periods.
- You will lose (and may have to repay) borrower benefits you are receiving from your current lender.
- Extending your loan means you will have to pay longer and you may pay more interest.
- You may have to pay prepayment penalties to your current lender.
- Your total loan repayment amount may be larger.
Things You Should Keep in Mind before Consolidating Student Loans
When considering consolidating your student loans, carefully analyze your current situation. Think about the number of student loans you have and how many years you have left to pay on them.
If you only owe a small amount (e.g. less than $5000) that you can pay off within a few years, consolidation may not be worth the effort it takes to complete it.
Additionally, if your payments are not burdensome to you, there may be no genuine reason to refinance.
"You should do a careful comparison between loan consolidation plans and the loan arrangements that you already have to be sure that you will really be better off."
Make certain that the amount you will save on your monthly payment is enough to make the refinance worth it.
Compare interest rates carefully and make sure that you won't have to pay exorbitant prepayment penalties if you consolidate your current loans. Compare any borrower benefits that you might lose with those that you stand to gain.
Carefully examine all of the terms and conditions of the consolidation loans you are considering. Ask about discounts and make certain you get any and all discounts that may be coming to you.
Be sure to double check any questions or concerns you may have by visiting the websites of reliable financial institutions or government websites such as:
Talking with a trusted financial advisor such as an officer at your bank is also a wise step.
Fraudulent Lenders Abound! Best Place To Consolidate Student Loans?
Anytime there is money to be made, you can expect unscrupulous people to take advantage of the opportunity. Shop for student loan consolidation lenders with great care and avoid deals that simply sound too good to be true.
SEE ALSO: Banks To Refinance Your Student Loans For Safer Places To Consolidate Student Loans.
For example, some unscrupulous lenders try to lure you in with extraordinarily low interest rates, but legitimate lenders actually determine your interest rate by averaging all of the rates you are currently paying and adding an eighth of a percent.
This means that you should expect an interest rate that falls midway between your current highest and lowest interest rates.
You should also understand that you are not required to select a different repayment plan for federal student loans. Parent PLUS Loans, Stafford and Perkins loans typically have a 10 year repayment plan.
You can keep this plan if you want to. The only reason a lender would pressure you to extend this is that it would mean higher interest income for the lender.
Also be advised that legitimate student loan consolidation lenders do not charge upfront fees.
If you are consolidating federal loans, any charges and fees will be deducted from your loan check rather than charged to you.
In the Final Analysis
It's easy to see that there are many good reasons to move forward with student loan consolidation; however, there are also potential negatives that you should weigh carefully before taking the plunge.
When you take the time to make review all your options and enter into a straightforward student loan consolidation agreement fully informed, you will have the best chance of a wholly positive outcome.