As a student loan counselor, I often work with clients who make separate payments on multiple student loans to many servicers. This often results in mass confusion and unnecessary complications for the borrower. Although loan consolidation can alleviate this repayment nightmare, I recommend you review the pros and cons of consolidation before jumping in with both feet. This post will highlight the major ups and downs of student loan consolidation to help you decide if its’ the best fit for you.
This post also comes with a broad disclaimer – the following information applies to federal student loans only. If you have private student loans that were not awarded through the Department of Education, review your loan documents or talk with your lender to explore potential repayment options. And buyer beware, private student loans are typically inflexible with few repayment options. Your private lender will often expect full payment when due or you may be flirting with the disaster known as default.
To find out whether or not your student loans are federal, pull a loan report at www.NSLDS.ed.gov (click on “Financial Aid Review”). You’ll need your 4 digit favsa pin to access nslds. This site offers information about your federal student loans only including how many you borrowed, the types of loans, loan balances and interest owed. This is the starting point for determining which repayment options are available to you.
If you don’t see your loan on this list, it is either a private loan or it may have been issued through a state agency. Again, talk with your servicer for repayment options or review your loan documents for more information.
1. One Monthly Payment
This convenience alone persuades many borrowers to consolidate. Instead of paying a multitude of servicers at different times of the month, you’ll have 1 single payment.
2. More Payment Options (maybe)
Once consolidated, your payment options may increase because several income based plans are available for consolidated loans. To learn more about these plans, visit www.studentloanborrowerassistance.org and http://studentaid.ed.gov for more information.
3. Lower Payment (maybe)
When you consolidate student loans, even the standard repayment plan may lower your current monthly payment. This is because the repayment term may increase from 15 years up to 30 years (from the 10 year standard repayment plan for individual loans) depending on the total loan balance you owe. To estimate payments and total liability under a variety of repayment options, visit IBRinfo.org.
4. Lower Interest (maybe)
Your interest rate may also go down on some of your loans when you consolidate. This happens when older individual loans have a variable rate that adjust annually (July 1st of each year). A consolidated loan’s interest rate will be the weighted average of your current loans rounded up to the nearest 1/8 of a percent. It will also be a fixed interest rate making it predictable and constant in times of rising rates.
1. You May Pay More Overall
The biggest disadvantage of loan consolidation is it can lead to paying more in the long run. This happens simply when your repayment term is extended which can boost loan balances due to thousands of extra dollars paid for interest.
2. Interest Rates May Increase
We all know interest rates have been historically low for several years. They’ve inched up slowly and no one can predict when rates will climb again. If you consolidate when rates are dropping, you may pay more in interest simply because your interest rate will be locked in while rates in general may continue to fall even lower.
3. You May Lose other Loan Perks
Before jumping on the consolidation band wagon, check with your loan servicer or lender to make sure you won’t give up any options or advantages to your individual loan by consolidating them all together. You want to approach this decision well-informed and with your eyes wide open for the best results.
Making the decision
Before deciding if loan consolidation is right for you, do a bit of sleuthing to gather your pertinent loan information including balances, interest rates, length of current repayment plans, and names of servicers. Without this information, it will be difficult to assess if consolidation is really in your best interests.
Consolidating your student loans may be a smart move but it all depends on your particular situation. If you’re struggling to make payments that don’t fit your budget, consolidation into an income based repayment plan or another option that extends the repayment term may be just what the doctor ordered.
On the other hand, if you can afford your payments as is and are simply looking for more convenience, consider setting up automatic payments from your bank account. Sure, it may be a hassle do all the upfront work, but once each loan payment is set up, you can cruise forward on automatic pilot knowing your student loans are under control.
Give us a call at 888.577.2227 or visit our website at www.ConquerYourDebt.org if you have questions. Ask to speak with a counselor that specializes in Student Loan Counseling. It is free and safe and will help you take charge of your current situation.
Author Barbara Miller is a Financial Counseling at LSS Financial Counseling and specializes in Bankruptcy Education and Student Loan Counseling.