If you’re like most people in the US, you probably have a large amount of student loans. This can be overwhelming and confusing, especially while you’re still in school. Luckily, there’s a way to tackle this situation head-on. Student loan consolidation simply means putting all of them into one loan.
While some people argue that this isn’t the best idea for everyone, it does come with many benefits. Read on to learn more about the pros and cons of consolidation, how the process works, and who should consolidate their loans or not.
what is student loan consolidation?
You can combine multiple federal student loans into one loan with a fixed or variable interest rate. This means that if you have multiple federal student loans with different rates, consolidating them will allow you to pay back your debt with one single payment and interest rate.
That’s why it’s important to understand how your payments will be calculated before making this decision.
If you consolidate loans through the Direct Consolidation Loan program (also known as DL), the new loan will come with a fixed interest rate for the life of the loan unless Congress changes it—which doesn’t happen very often.
The good news is that this helps borrowers plan for their monthly payments because they know exactly what they’ll be paying each month until their balance is paid off in full.
Benefits of Student Loans Consolidation
The benefits of combining federal loans into one loan are gain simplicity with;
- monthly payments
- reduce interest rates and monthly payments
- potentially qualify for more repayment plans and forgiveness programs, and more.
So what’s the catch? There isn’t one. Student loan consolidation can be a good option if you owe a lot of money or if your current repayment plan is not working for you. But there are also some drawbacks with consolidating your student loans. Let’s see what they are in the next section.
Disadvantages of Consolidating Your Student Loans
The disadvantages of consolidating your loans include losing the interest rate reduction incentives, losing access to grace periods before you have to start paying loans back, and having a longer time period to pay off the loans.
If you are in repayment on your student loans, keep in mind that consolidating them with another lender will mean that they no longer qualify for those interest rate reductions. You can still get help with repayment through Income-Driven Repayment plans or other options if it makes sense for your situation.
You may also lose access to any grace periods built into your current loan terms if you consolidate them into another program (e.g., direct consolidation does not come with a six-month grace period).
However, there are some exceptions depending on which type of consolidation option is used:
For Federal Direct Consolidation Loans: If a borrower has three consecutive months of consecutive deferments on their existing federal student loan(s), they will be eligible for an extended nine-month window during which no payments are due in order to apply for income-driven repayment plans or deferment/forbearance options under their new consolidation loan(s).
Lear more about Student Loan Deferment
This extension does not apply if the borrower applies only for an extension of time before beginning payments after graduation or leaving school without being enrolled at least half time; in this case they must make payments according to their original schedule before any extensions begin (if applicable).
Additional Tradeoffs for consolidating your student loans
Consolidating your student loans is generally a good idea, but it comes with some tradeoffs.
Convenience: If you qualify, student loan consolidation will simplify your payments and reduce the frequency of them. Your monthly bill will be one consolidated payment, rather than several smaller ones. You’ll also have just one monthly payment to make instead of several.
The downside is that once you consolidate your loans, it can be hard to get out of that agreement. If you change jobs or lose income in some other way, consolidating may not be the best choice for you anymore.
Interest rates: There’s no way around this. Consolidating will almost always increase the total amount of interest paid on your debt over time because interest rates tend to go up over time as well as down (and vice versa).
That said, if interest rates are higher when you consolidate than what they would’ve been if you hadn’t consolidated due to creditworthiness issues or other factors unrelated to consolidation itself then maybe this isn’t such a bad thing after all!
Repayment options: Student loan consolidation makes it easier for borrowers who might otherwise not qualify for certain repayment plans—like income-based repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income Contingent Repayment (ICR) plans.
To use these programs without having their payments adjusted based on income level too much through lower monthly bills than they’d otherwise have had without consolidation; however again though this depends on how much money each individual has coming in every month post-consolidation versus pre-consolidation so while there might be less flexibility when choosing which type
What is the application process for Student loan Consolidation?
The process is simple, but it will take some time. You’ll need to fill out the application online, and then submit additional documents such as tax returns and proof of income. Once you’ve submitted all of your information, you can wait for a decision on your application. If you’re denied, you’ll have to start over by submitting new documentation before reapplying.
If your application is approved, get ready to receive financial aid in the form of student loan forgiveness or repayment benefits (if eligible). The Federal Student Aid website has great resources and customer service that can help answer any questions you have about consolidation and other financial aid-related topics.
Bottom Line
So if you’re ready to take the plunge and consolidate your loans, remember that it’s a big decision, but one that you won’t regret. The benefits are numerous and will make managing your money much easier in the coming years.
In fact, we hope that consolidating your loans will help you feel empowered when it comes to personal finance decisions—and also to remember that there is light at the end of this student loan tunnel. Even if you have a mountain of debt ahead of you, we encourage you to keep telling yourself: “I can do this!”
