Did you know that student loan debt continues to rise? Forbes report that students, recent grads, and parents are struggling to manage the $1.5 trillion debt crisis. Living the American dream has become a balancing act, and many people are asking “Should I consolidate my student loans?”
There are conflicting opinions about student loan consolidation, and we’re here to look at the type of consolidation programs available and the pros and cons of consolidating your loans.
What is Student Loan Consolidation?
In today’s modern world, it’s common to take out loans to pay for essential items. When you buy a house, car or even go on vacation there is a multitude of loan terms available. However, people often find themselves managing multiple new loans, from multiple loan servicers, and it might become difficult to keep up with loan payments.
Consolidation is the process of combining debts from your various current loans and managing them with one monthly payment. Many people choose to consolidate their loans because it makes it easier to make payments. There are a variety of student loans people can access, and many companies offer student loans for parents to help their children with education costs.
Private Student Loans
Private student loans are offered by banks or other private-sector companies. If you receive a loan from your University, then this is also classified as a private loan. There are many advantages of private loans, but most people use them to cover the gap between federal aid and the cost of attendance. Private loans may be issued at both fixed or variable interest rates.
Federal Student Loans
Federal student loans are offered by the U.S. Department of Education and have fixed interest rates. This fixed-rate makes it easier to manage your repayments over the life of the loans, which make them attractive options for students. Instead of worrying about their repayments increasing, students will have fixed payments until they pay the loan in full.
The biggest benefit of federal loans is that many are subsidized while you’re still completing your education. Most federal loans come with a 6-month grace period, so repayment won’t begin until around November for traditional graduates. Federal loans also allow afford you flexibility to enroll in income-driven repayment programs, where payments are capped between 10-20% of your income. Additionally, they offer people the opportunity to have deferment periods from their repayment plan if they’re struggling financially.
Most people choose an initial federal loan but incorporate a private loan if they need more money. This leads to problems when people have multiple loans to pay off at once. Many people turn to consolidation options to manage their loan payments, but is consolidation the best choice?
Why Consolidate Student Loans?
It’s common for students to borrow money to cover each semester of their education, which means many people owe money from multiple lenders (both federal and private lenders). If each separate loan has repayment terms and interest rates, then it’s easy to see why student loan borrowers choose to consolidate their student loans.
If you have federal student loans, you can use the Direct Consolidation Loan Program. This program enables you to combine all your loans into one fixed interest rate, making it easier to manage your payments. However, private student loans aren’t eligible for the Federal Direct Consolidation Loan Program and if you want to consolidate them, you’ll have to enter into a refinancing agreement.
It’s important you know your options before making a decision and know if your loans are federal or private. In most cases, it’s likely you have a variety of loans, but you can choose the ones you’d like to consolidate.
For example, if your parents took out a Federal PLUS loan, you can’t consolidate that in with your other federal loans.
Questions You Should Ask Yourself
Before we look at the pros and cons of consolidating your education loans, ask yourself these important questions.
What’s My Financial Situation?
Are you in stable employment? Do you receive a good salary? These two factors make you an excellent choice for consolidation if you’re repaying a private loan.
Is My Credit History Good?
Applicants with a strong credit rating can access lower interest rates when they consolidate their private loans. If you don’t have a good credit score, you might consider having a co-signer.
Will I Save Money?
Combining your multiple loans into one lump sum doesn’t mean you’ll save money. This helpful calculator from Student Debt Relief will show you how much money you could save.
Does My Employer Have A Repayment Program?
Many companies notice the impact student debt has on their employees and turn to companies such as FutureFuel.io to implement financial health programs as one of their employee benefits.
Before you think about consolidating your student loans, check what your employer can offer you in terms of benefits and incentives. If they have a strong program, you might not need to consolidate or refinance student loans (which is also called private consolidation).
Is My Loan Private or Federal?
Depending on the type of loan or loans you need to repay, consolidation might not be the best option. If you choose to consolidate your private student loans, you’ll have to enter into a student loan refinancing agreement.
The Pros of Student Loan Consolidation
There are many benefits of consolidating student loans, but there are also disadvantages too. Let’s look at the advantages student loan consolidation offers first. Remember, some of these benefits might only apply for private or federal loans.
You Can Get a Fixed Interest Rate
Private student loan consolidation depends on your credit score and your future financial outlook. The great thing about this is if your credit rating is good, you can access a lower interest rate. Check your current credit score here to see whether you qualify.
You Can Lower Your Monthly Payments
Direct loan consolidation can increase your repayment period, which will lower monthly payments. If you struggle to balance your monthly budget or have an uncertain future when it comes to job stability, it makes sense to know that you can pay a lower amount and reduces your chances of incurring debt.
You Struggle to Manage Money
Some people are great at managing their finances, and others struggle. If balancing your bank account isn’t your strong point, then you’ll find it easier to manage your student loans with one monthly payment.
Consolidating your student loans can help you keep track of where your money is going each month and budget accordingly.
The Cons of Student Loan Consolidation
While there are many benefits of consolidating student loans, there are also disadvantages that we can’t ignore.
You Might Pay More in The Long Term
Extending the term of your student loan gives you a lower interest rate, but it also extends the repayment period too. If you want to enjoy a debt-free future, it might be worth paying off the remaining balance rather than opting for a lower interest rate.
Many people choose a lower interest rate out of necessity, so think about your future before making a choice and try to balance your finances to avoid a longer repayment term.
You Can’t Use The Debt Avalanche Method
The debt avalanche method is a great way to minimize your interest rates and pay off your loans quickly. By prioritizing loans with the highest interest rates, you can save a lot of money in the long-term. This useful guide from The Balance Careers explains how to use the debt avalanche method.
However, federal consolidation loans combine all your repayment amounts into a weighted average. While this makes it easier to repay your outstanding amounts, it means you won’t be able to use the debt avalanche method.
You Won’t Get Federal Repayment Benefits
There are many repayment benefits available for federal student loans through the Federal Family Education Loan (FFEL) Program or Perkins Loans, for example. Repayment Programs enables agencies to contribute a certain amount to participants which helps them pay off the student loan. These schemes can help minimize the debt associated with student loans and you can find out more about repayment programs here.
If you work in a public service role for a minimum of 10 years, you could be eligible for the forgiveness program. To qualify for Public Service Loan Forgiveness, you must be employed in one of these situations:
- Local, State or Federal Government roles.
- Family or child agencies.
- A non-profit organization.
- An agency that works to benefit the public, such as health, law enforcement or law services.
You can find out more about the Forgiveness Program . Once you consolidate your loans, you’ll lose the benefits associated with the original loan agreement, so it’s important to consider your options first.
Should I Consolidate My Student Loans?
The complicated thing about student loan consolidation is there’s no simple yes or no answer. The fact is consolidation has many benefits, but there are also disadvantages depending on your individual circumstances.
In some cases, direct consolidation can help you manage your federal loan payments, but you must ask yourself if it’s worth missing out on the repayment benefits federal loans offer. Private loan consolidation can be beneficial if you have a good credit rating, but some people prefer to relieve themselves of debt sooner rather than later.
Consider your financial situation, and weigh the pros and cons we’ve listed above. For some, debt can be a huge weight on their shoulders, but there are plenty of options available if you need to reduce the burden of managing multiple payments.