Student Loans – Is Consolidation an Option?

After taking a long hard look at your student loans and their respective interest rates, let’s turn to the options for managing and dealing with this debt in an efficient way.

The first option we will cover is consolidation. There are major benefits to consolidating your student loans, but there are some drawbacks – I’ve set out the pros and cons below for you to think about. Obviously, everyone’s financial situation is a little bit different so think carefully about what is best for you and your money.

Pros of Consolidation:

  • If you have multiple loans with different organizations, consolidation alleviates that administrative burden by combining all of your student loans together – the result of which is one payment to one company once a month. Easy peasy.
  • Consolidation can lower your monthly payment (if you are currently struggling to make the minimum) by extending the duration of the loan. But remember… this means that most of your monthly payments will be going towards interest only, not the principal amount of the loan. If you have a lot of higher interest debt (credit cards) to pay off first, this may be a viable option.
  • Consolidation may give you more options for income-based repayment plans (particularly if you have US Federal Government Direct Loans).
  • Consolidation will allow you to move any student loans with variable interest rates to one that is a fixed interest rate. For more information on variable interest rates versus fixed interest rates, click here.
  • If you have had any federal student loans in default (naughty, naughty), consolidation can be an effective way to remove the negative impact on your credit report more quickly than mere repayment.

Cons of Consolidation:

  • I touched on this above – consolidation typically increases the duration of your loan, which means you may end up paying more interest over the life of the loan than you wound under your current plan, even if you have a higher interest rate (unless you pay it off much earlier than the estimated date).
  • Consolidation can lead to the loss of certain benefits under the terms of your current student loan agreement (discounts on interest rates, loan cancellation benefits, etc.). Check the terms of your current loan for more details.
  • If any of your loans are part of a Public Service Loan Forgiveness program or one that is an income-based repayment plan, consolidation will mean losing credit for any payments made towards either of these programs… not good. If you are part of either of these programs – consolidation is not for you.
  • Once your loans are consolidated and combined into one new loan – they cannot be removed and the consolidation cannot be reversed. The original loans have been paid off in full and no longer exist. You are left with a brand new loan with new terms.

There are two types of consolidation – consolidation of federal student loans (US only) and consolidation of private student loans. So if you have both private and federal student loans, consolidation may not make your life any easier.

If you are consolidating federal student loans, you are not eligible for a lower interest rate – rather the duration of your loan is longer, making your monthly payments lower – therefore, it may end up costing you more in the long run. In fact, when consolidating federal student loans, the consolidation loan’s interest rate is rounded up one-eighth of a percent from the original interest rate. If you are consolidating private student loans, you are more likely to secure a lower interest rate. One consolidation company I recommend is American Debt Enders – they can help with consolidation of all kinds of debt including student loans. Another possibility is CuraDebt – they are highly rated and great to work with. Either company will give you a free evaluation online – give it a try!

It is crucial that you understand the terms of your current student loans (interest rate, type of loan, repayment plan, term of the loan, etc.) before deciding which option is best for you. If you decide that you would like to consolidate your US Federal student loans, click here to apply for a Direct Consolidation Loan.

Next up on your list of options – refinancing your student loans.

Sincerely yours in harmonious fun and fiscal responsibility,

Rachel

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