When you graduate from college, you will most likely have some loans to payoff. There are two main types of student loans, federal and private. Federal loans are funded by the U.S government and after graduation, borrowers are automatically enrolled in a 10-year standard repayment plan with a repayment grace period of six months. Private loans are nonfederal loans funded by a lender such as a bank, state agency, or credit union. For private loans, there is no standardized rule as to when repayment begins. This is completely up to the lender.
For every semester you take out a loan, a new loan is created. By the time you graduate, it is common to end up with several loans with varying interest rates. Having several loans to keep track of can be difficult to manage, which can make loan consolidation a tempting solution.
Loan consolidation is when you take all or some your loans and group them together into one new loan. The new loan pays off all of the loans being consolidated. This may seem like an easy answer to the hassle of having several loans to deal with, however, there are drawbacks in doing so. Be sure to weigh your options before you make the decision to consolidate.
------------------------The Pros and Cons------------------------
Pros:
One payment: Consolidation can simplify loan repayment by giving you a single loan with just one monthly bill serviced by one lending institution.
Lower payments: Consolidation offers a variety of repayment plans that can extend the terms of the loan from 10 years to 15, 20, up to 30 years. The longer term can significantly lower your monthly payment amount. Borrowers can also switch repayment plans at any time for free.
Fixed interest rate for federal student loans: A consolidated federal student loan, which is called a “direct consolidated loan”, has a fixed rate for the life of the loan. The interest rate is determined by taking the average of the interest rates on the loans being consolidated and rounding it up to the nearest one-eighth of 1%.
* Note: For private loan consolidation, the lender determines your new rate.
Renewed eligibility for benefits: Since a consolidated loan is a new loan, it restarts the clock on deferments and forbearance for up to three years.
No minimum or maximum: There is no minimum amount or maximum amount that can be consolidated.
Cons:
Pay more in interest over time: When you consolidate and extend the terms of your loan, you could be paying significantly more in interest.
Lost grace period: Repayment on consolidated loans will typically start two months after the loan is approved.
Interest rate increase for federal loans: Since the interest rate is determined by taking the average of the interest rates on the loans being consolidated and rounding it up to the nearest one-eighth of 1%, the new rate will be higher than a simple average you were paying previously.
Beware of variable rates: When consolidating private loans, you may be offered a low but “variable” interest rate. This means the interest rate can dramatically fluctuate, along with your payments.
Loss of some benefits: Be aware that certain benefits of federal loans will be eliminated if they are consolidated. Some examples are:
1) Income-driven repayment plan. This plan can reduce your total monthly payment for your student loan by limiting it to a percentage of your income. After you make payments under the plan for 20 to 25 years, any remaining loan balance is forgiven.
2) Public service loan forgiveness. This benefit can eliminate some of your student loan if you make 10 years worth of monthly payments while working for a nonprofit organization or for the government. The remaining balance will be forgiven.
Unable to consolidate private loans into federal loans: Student loans from private lenders are not able to be part of the federal consolidation loan program. Private lenders do allow consolidation that includes federal loans, but the interest rates are usually much higher.
No do-overs: Once your loans are combined, they cannot be removed.
With federal consolidated loans, the key terms of the loan do not vary. There are no application or origination fees involved and there are no prepayment penalties. Federal law sets the repayment schedule and sets a ceiling on the interest rate. Private consolidation lenders, on the other hand, are not subject to those terms and may include variable rates and numerous fees.
Managing several student loans can be stressful. Consolidating student loans may be a strategy to lower monthly payments and simplify managing your student loan debt, but in the end, you will most likely be paying significantly more and possibly lose important benefits. It is usually advisable, if you can handle the monthly payments, to keep the original loans, taking advantage of any benefits available to you, while paying off the debt as soon as possible. In the long run, the extra effort in keeping track of the many loans and payments could be financially well worth it for you.
Carol Chaudet
(Last updated 3/25/2019)