Should You Consolidate Your Student Loans?

Pros of Consolidating Student Loans

Every borrower has various reasons why they want to consolidate loans via the Direct Loan Consolidation program. Apart from the payment relief programs and benefits such as PAYE and REPAYE, here are some of the pros you get for considering the Direct Loan Consolidation program:

• Single monthly payments

Consolidation is simply talking all your federal loans and putting them into one. Only one lender will repay the loan, and you will only have to make one payment every month. If you use mail to send your expenses, you will be saving some money on envelopes and stamps, besides saving a lot of time.

• Avoids missed payments

By consolidating of student loans, you are changing your payment terms and reducing the monthly payments. This makes it easy to avoid defaulting if you have a hard time making monthly payments. By defaulting, you are causing damage to your credit score, and it will stay in your report for seven years.

• Fixed interest rates

If many loans overburden you, each of them has individual interest rates. For a consolidated loan, you get a fixed rate all through the repayment period. The interest rate for your new loan is calculated by finding the average interest of your existing student loans, which will be rounded off to 1/8 of one percent.

• Reduced payments

When you consolidate your student loan, you have a wide range of payment options. Your loan payment period can be extended from ten years to fifteen years and up to thirty years. By extending your loan repayment term, you could be saving up to fifty percent of your loan repayment, which offers you affordability as you handle your career. You can further get low-interest rates which lower payments.

• Several repayment plans

A consolidated federal student loan is open for many repayment programs, and you can choose a plan that works for your situation. You can also change the repayment plan anytime you want to. The repayment plans under a Federal consolidation include a ten-year standard repayment and an extended program for twenty-five years, Graduated, and income-based, depending on your discretionary income. 

• Better forbearance options

Since a loan consolidation is counted as a new loan, you can get a forbearance lasting for even three years. Also, suppose you cannot repay your federal student loan because of a job search. In that case, you can sign up for an economic hardship or unemployment deferment, which delays your payment period. 

• All amounts qualify

With consolidation, there is no minimum or maximum funds that will be considered. You can therefore get a consolidation for all student loans of any amount.

• Protecting your credit score

By paying your student loans on time, you are positively impacting your credit score. If you miss a single payment, you get a bad credit score. Every month, having a single payment makes things more accessible instead of paying 10-15, which can easily be forgotten. If you want to keep a strong credit score, you get a better credit score.

• Automatic payments

If you are consolidating your student loan because of monthly payments too many lenders are hard to keep up with, you can use an automatic debit to pay the bill from your account every month and get it done. Always ensure you fund your account every month. 

• Discount on loans

Some banks offer discounts when you set up automatic debit repayment. Some banks offer 1% discounts after making on-time payments for more than 36 months as long as the borrower keeps paying on time.

Cons of Consolidating Loans

Despite having the best benefits, there are a few cons that come with taking a Direct Loan Consolidation program:

• High interest to be paid overtime

If your consolidation allows you to extend your loan term, you may end up paying more interest. The longer your loan repayment period, the higher the claim to be paid. Extending your repayment for up to 25 years could disadvantage you, especially if you want to buy a home, invest in a business, buy a car or relocate. By paying your loans on time, you will end up saving a lot of time.

• Average interest rates

A direct loan consolidation interest rate is rounded off to an eight of 1%. The new interest rates will be determined by averaging the other rates to consider the amount to be paid. And if your loans are larger, you will have more interest to pay, which will be somehow higher than the normal average.

• You cannot consolidate Private loans

If you took a student loan from a private lender or institution, you could not get into the Federal Consolidation Loan program. At the same time, some private lenders would provide consolidation of federal loans only that the interest rates on their loans will be higher than for refinancing.

• You lose benefits

If you have already made the payments to public service loan forgiveness, a consolidation of the loans will help begin the clock on being eligible. If the Perkins loan is made a part of a federal direct consolidation loan, you might lose advantages on other programs, specifically the Perkins loan. It is advisable to scrutinize all the terms and conditions of the consolidation before deciding.

• You lose the grace period.

There is a six-month window that is issued to borrowers before the start of the loan repayment period. When you consolidate your loans, that offer is off the table. Two months after the approval of your loan consolidation is approved, the repayment begins.

• No lender benefits.

If, as a borrower, you meet certain conditions, you get reduced interest rates or principal reductions from some lenders. If you consolidate your student loans, these benefits are lost.

• No re-consolidation.

The consolidation of these federal student loans can take place only once. If the interest rates reduce after the consolidation, there is no good to come out of that since you remain stuck with the interest rates you agreed to during the consolidation.

Bottom Line

If you have a challenge remembering all the repayment dates for your loans, consolidating your student loans may give you some relief. It does not matter if you choose a federal consolidation or a refinance for private loans.

It all comes down to how comfortable you are with the terms and how manageable the disadvantages are. 

By going through the pros and cons, you will have the necessary information to guide you on what to do next. If you feel like the many monthly payments burden you, you can opt for a federal student loan consolidation, giving you an option of a single charge that leaves more money for you.