Pros and Cons of Consolidating Your Student Loans
Written by: Kristy Welsh
Last Updated: October 3, 2017
With student loan debt standing at over $1 trillion (yes, you read that right), just about anyone you talk to has taken out more than one student loan to pay for their college education. Having all of these different loans, different payments, different payment due dates to contend with, it is no wonder some of these payments get lost in the shuffle and wind up being late. Not only does this affect your credit score, but it also increases your overall interest payments.
One way to manage all of these loans is to consolidate them into one bill. Not only could this simplify your life, but it could reduce your overall monthly payment. But it is a good idea? Will combining them or refinancing them be beneficial for you? Below we have put together the pros and cons of consolidating private and federal student loans.
Types of Student Loans
Our advice is going to differ between Private Loans and Federal Loans. Private student loans cannot, in general, be consolidated WITH federal student loans. The low interest rates on federal consolidated loans are not available to private education loans. On a private loan, you are really "refinancing" the loan instead of consolidating it.
Advantages to Consolidating Federal Student Loans
The biggest advantage to consolidation is to simplify your repayments. If you have a student loan for each school year (freshman, sophomore, junior, senior years), putting these all together into one lump sum will have you making one payment each month — instead of four. This makes bill paying at the end of the month much easier and you are less apt to forget to pay on one of these loans.
Another advantage to consolidation is decreasing your monthly payment. When you consolidate, you restart the length of your loan, which means you can repay your debt over a longer time. This will reduce your monthly minimum payment, but it will extend the length of time your are paying on this loan. If you are struggling with meeting all of your monthly payments, having a lower one will surely help your budget.
Disadvantages to Consolidating Your Federal Student Loans
Just as with the advantages of consolidating your federal student loans, it is important to understand the potential disadvantages to consolidation. For example, you will have an option of taking longer to repay your loans, so a consolidation loan could cost you more over time since interest keeps adding up until you are done paying.
Also, if you consolidate your loans while you are still in school, you will lose your grace period. Therefore, it is important you weigh the pros and cons of consolidation carefully and to make sure consolidating your loans is in your best interest and worth the effort.
Consolidating Private Student Loans
A private student loan is very different from a federal student loan. These types of loans are either categorized as a home equity loan or a private education loan. The interest charged on these loans is based on your credit score and the market place. So, if you are thinking of putting all of your private student loans together, you are basically refinancing your loans and will have to go through the entire loan process all over again.
Private education loans tend to have interest rates that are in the same ballpark as home equity loans. If your private education loan has a variable interest rate, you might consider using a fixed rate home equity loan to pay off the private education loan, effectively locking in the interest rate.
You should not consolidate your federal student loans together with your private education loans. They should be consolidated separately, as the federal consolidation loans offer superior benefits and lower interest rates for consolidating federal student loans.
Student loan consolidation is a great opportunity to organize your financial life and allow you to focus on debt elimination. You must be disciplined and focused. Student loan consolidation typically makes good sense for most people. Research your options and dedicate yourself to paying off your debt, and you will be on your way to a healthy financial future.
Here is more information regarding student loans.