The Pros and Cons of Student Loan Consolidation

The Pros and Cons of Student Loan Consolidation

Graduating from faculty comes with the acknowledgment of nice achievement — and, in case you’re like 70% of graduates, a burden in your again within the type of student loan debt.

Recommended Student Loan Consolidation Companies

The common faculty grad leaves faculty with $40,000 price of debt. But if you switched majors, transferred faculties, or went on to graduate faculty, you could be among the many 19% that owe $50,000 and above, or the 5.6% who owe greater than $100,000.

Lending Partner

Min. Loan

Fixed APR

Eligible Degrees

  • College Ave

    Eligible Degrees

    Undergraduate & Graduate

    NEXT

    on lender’s safe web site

  • Credible

    Eligible Degrees

    Undergraduate & Graduate

    NEXT

    on lender’s safe web site

  • Discover, Member FDIC

    Eligible Degrees

    Undergraduate

    NEXT

    on lender’s safe web site

  • LendKey

    Eligible Degrees

    Undergraduate & Graduate

    NEXT

    on lender’s safe web site

  • Sallie Mae

    Eligible Degrees

    Undergraduate

    NEXT

    on lender’s safe web site

  • SoFi

    Eligible Degrees

    Undergraduate & Graduate

    NEXT

    on lender’s safe web site

  • College Ave

    Eligible Degrees

    Undergraduate & Graduate

    NEXT

    on lender’s safe web site

  • Credible

    Eligible Degrees

    Undergraduate & Graduate

    NEXT

    on lender’s safe web site

  • Education Loan Finance

    Fixed APR

    Starting at 2.75%

    Eligible Degrees

    Undergraduate, Graduate & Parent Loans

    NEXT

    on lender’s safe web site

  • LendKey

    Eligible Degrees

    Undergraduate & Graduate

    NEXT

    on lender’s safe web site

  • SoFi

    SoFi Logo

    Eligible Degrees

    Undergraduate & Graduate

    NEXT

    on lender’s safe web site

  • Splash Financial

    Eligible Degrees

    Undergraduate & Graduate

    NEXT

    on lender’s safe web site

  • Discover, Member FDIC

    Eligible Degrees

    Undergraduate & Graduate

    NEXT

    on lender’s safe web site

Chances are in case you’re coping with student loan debt, you’re not simply coping with one loan. Each semester, you might have taken out a brand new loan. And in case you couldn’t cowl the prices with federal loans, you very nicely might have turned to a personal lender, similar to a bank or different lending establishment (e.g., Sallie Mae) to fund the remainder of your bills.

One possibility you’ve got once you start tackling your student loan debt is to discover student loan debt consolidation. But earlier than you head down that street, right here’s what you need to know.

What is Student Loan Consolidation?

If like many faculty graduates, you’ve got a number of student loans, you’ve most likely heard the time period “student loan consolidation” thrown round greater than as soon as when speaking about compensation choices. Simply put, that is the method of mixing your a number of student loans right into a single, greater loan, probably with a brand new lender. 

You’ll now not owe the unique loans, and since this consolidated loan is new, it is going to include a brand new rate of interest, a brand new fee coverage, and new phrases and situations.

There are each advantages and downsides to consolidating your loans, which we’ll talk about on this article. Choosing to consolidate your loans is a person selection and the fitting determination will rely upon the specifics of your loans — the kinds of loans, rates of interest, balances, borrower advantages, and extra — in addition to your present monetary scenario.

Pros and Cons of Student Loan Consolidation

It’s essential to keep in mind that there are several types of loans — most importantly, there’s a giant distinction between federal loans (these issued by the U.S. authorities) and personal loans (these issued by a bank, credit union, or different lending establishment).

Each has its personal execs and cons, which we’ll get into in somewhat bit. But generally, listed here are among the advantages and potential drawbacks when contemplating student loan consolidation.

Pros of Student Loan Debt Consolidation

  • Simplicity: Consolidating your student loans could make coping with them rather less unwieldy, with only one or two month-to-month funds and one or two accounts to maintain observe of. (Many sources advise in opposition to consolidating non-public loans with federal loans — as an alternative, they suggest that you just consolidate your federal loans into one loan and personal loans into one other.) If you’re forgetting to make funds and have problem holding observe of all your totally different loans, this may preserve you organized and show you how to to keep away from lacking funds — which can lead to late charges or harm your credit.
  • Potentially decrease funds: Consolidation can probably decrease your whole month-to-month student loan fee with both a decrease rate of interest or longer compensation interval, however this is determined by the rates of interest and phrases of your present loans. This is particularly helpful in case you’ve been struggling to make funds and may’t qualify for a deferment or revenue based mostly compensation plan.
  • Better credit, higher charges: If you’ve graduated and gotten a (hopefully) nice job, and have been making accountable monetary selections similar to holding your credit card balances low and making funds on time, your credit rating might have gone up. If your credit rating has improved because you initially took out your loans, you could be eligible for a decrease rate of interest on a brand new consolidation loan since lenders will think about you much less of a danger than you beforehand have been. This will clearly rely in your credit historical past, the charges in your present loans, and the rates of interest your new lender can give you.
  • Dodge default: One in 10 debtors has defaulted on federal loans, in line with the Department of Education. If you’re in default, loan consolidation can supply an answer, since it may possibly probably decrease your month-to-month fee, relying in your loans. You could also be required to get your loans into good standing earlier than with the ability to consolidate them, although.

Cons of Student Loan Consolidation

  • Loss of advantages: Depending in your loans, you could lose sure borrower advantages in case you mix your loans. Examples embody loan forgiveness — the place all or a portion of your loan debt could be cleared in case you meet sure situations — versatile or income-based fee choices, or deferments.
  • Potentially increased charges: Depending in your present rates of interest and loan quantities, you may really find yourself paying increased rates of interest and rising the general quantity you owe. You might find yourself paying extra in your loans than you’d have in case you didn’t consolidate them.
  • Longer compensation interval: While it may possibly decrease your preliminary fee, a consolidation loan can lengthen the period of your debt, and you could find yourself really paying extra over time.
  • Beware of variable charges: When consolidating your non-public loans with a personal lender, you could be provided a low however variable rate of interest (versus a set price). That means the speed can improve over time — typically dramatically so — and due to this fact so can your funds.

Federal Student Loan Consolidation

Hopefully, you tried to reap the benefits of monetary support in faculty — particularly, federal student loans — earlier than turning to personal loans, which frequently carry a better rate of interest and include fewer borrower advantages.

If you probably did, you could need to learn to particularly consolidate these federal loans. The Direct Consolidation Loan means that you can consolidate a number of federal student loans into one.

Pros of Consolidating Federal Loans

  • Lower funds: Consolidating your federal loans can decrease your month-to-month funds by giving you as much as 30 years to repay your loans.
  • Fixed charges: The rate of interest on a Direct Consolidation Loan is a set rate of interest, which suggests it is going to stay that means at some point of the loan. Unlike with a personal loan, your new federal mounted price will rely not on present market situations however in your present federal loans: Your mounted price will probably be the weighted common of the rates of interest on all your loans being consolidated, rounded as much as the closest one-eighth of 1 %.
  • Renewed eligibility for advantages: Once you consolidate your federal loans, it “resets the three-year clock on deferments and forbearances,” in line with finaid.org. If you’ve beforehand used up your allotted time on deferments, together with unemployment and financial hardship, you may be eligible for them once more. The identical is true for forbearance, a interval permitting you to briefly postpone your student loan funds.

Cons of Consolidating Federal Loans

  • You would possibly pay extra general: If you decrease your month-to-month fee by extending the period of the loan (say, from 10 to 30 years), you could find yourself paying much more cash in curiosity in the long term.
  • Borrower advantages out of your authentic loans could be misplaced: This can embody rate of interest reductions and principal rebates. You would possibly lose the advantage of a versatile fee plan or different fee choices similar to a deferment. Consolidating may revoke kinds of loan cancellation, and you could now not be eligible for student loan forgiveness.
  • Loss of grace interval: If you’re in your grace interval once you determine to consolidate, you lose the remainder of your grace interval and want to begin making funds instantly, in line with finaid.org. This would additionally embody the curiosity advantages of a backed loan, the place the federal government is paying your curiosity so it doesn’t accrue throughout your grace interval.

Federal Loans Eligible for Consolidation

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • Direct PLUS Loans
  • PLUS Loans from the Federal Family Education Loan (FFEL) Program
  • Supplemental Loans for Students
  • Federal Perkins Loans
  • Federal Nursing Loans
  • Health Education Assistance Loans

Stipulations for Federal Student Loan Consolidation

  • You can’t consolidate your non-public loans along with your federal loans right into a federal Direct Consolidation Loan.
  • You must have not less than one student loan (Direct Loan or FFEL Program Loan) that’s in compensation or in your grace interval.
  • You’re required to proceed making funds with preparations along with your present loan servicer previous to loan consolidation, in line with StudentAid.gov. Or you’ll must repay your Direct Consolidation Loan underneath the Income-Based compensation plan, Pay As You Earn compensation plan, or the Income Contingent compensation plan.
  • If your loans are in default, you have to meet sure necessities earlier than consolidating.
  • If your dad and mom took out a Federal PLUS loan, you may’t consolidate that in along with your different federal loans.
  • You can start compensation 60 days after your Direct Consolidation Loan is disbursed or sooner, relying in your servicer.
  • You can apply for a Direct Consolidation Loan by StudentLoans.gov. Continue to make funds in your present loans till the consolidation servicer confirms that your preliminary loans have been paid off as a part of the consolidation course of.
  • If you’ve got additional questions or need extra details about consolidating federal loans, go to StudentLoans.gov or name the Loan Consolidation Information Call Center at 800-557-7392. The U.S. Department of Education has plenty of useful data on federal student loan consolidation and extra data on learn how to apply.

Private Student Loan Consolidation

You can select to consolidate your non-public loans into one loan as nicely. Unlike federal loans, these loans will not be managed by the federal government. Instead, your loan is managed by a lending establishment, similar to a bank, credit union, faculty basis, or a state company.

Interest charges on non-public consolidation loans are based mostly in your credit and market situations, which suggests your new rate of interest will rely in your present credit rating. So in case you’ve already graduated, landed a job, and have began to strengthen your credit rating, you would possibly discover that you just’re eligible for a decrease rate of interest than once you initially utilized to your present loans.

Stipulations and guidelines for personal loan consolidation range by the monetary establishment you’re working with.

Unlike federal loan consolidation, a personal loan might carry a variable rate of interest, which suggests it — and due to this fact your month-to-month fee — can change over time.

Can You Consolidate Federal and Private Loans Together?

While you may’t mix your non-public student loans with federal loans into the Direct Consolidation Federal Loan, you could discover {that a} non-public loan consolidation will settle for your federal loans. However, most sources advise in opposition to consolidating federal and personal loans collectively.

There could also be some exceptions to the rule, nonetheless. For occasion, Discover Student Loans provides a personal consolidation loan that may very well be an excellent possibility for some debtors.

If you consolidate your federal and personal loans with a personal loan supplier, you could lose your likelihood to enroll in income-based compensation choices or to use for a deferment in case you change into unemployed, expertise an financial hardship, or expertise different circumstances.

You may additionally lose your capacity to discover loan forgiveness choices, the place all or a portion of your loan debt could be erased in change for becoming a member of the army, working in sure fields, volunteering, or shifting to a selected location.

For extra data on student loan consolidation and to find out if this selection is best for you, take a look at our student loan consolidation information.

READ:   Student loans - Marriage and Divorce have an effect on on debt