Is it Smart to Consolidate Your Student Loans?
Consolidation may make sense for some borrowers, but not for all.
Consolidation may increase your total interest payments. Extending repayment terms to up to 30 years may lower monthly payments but could cost more in total over time.
1. Lower Monthly Payments
If you have multiple student loans with differing interest rates, repayment terms and monthly payment amounts, consolidating them could help make life simpler. With a direct consolidation loan from federal student loan providers like Direct Consolidation Lending Group or Federal Direct Loan Servicer, all existing federal student loans will be combined into one payment with one servicer with typically lower fixed rates than existing rates to make payments more manageable and save money over time.
However, consolidating federal loans will change your repayment terms; up to 30 years may be allotted for paying off your combined debt instead of the standard 10-year repayment plan. Consolidation could cost more in interest, so it’s wise to carefully weigh all options available before deciding to consolidate student loans.
Consolidating student loans also involves capitalizing any unpaid interest from original loan balances and adding it to the principal, increasing payments significantly and potentially jeopardizing benefits like interest subsidies, reduced rates or public service loan forgiveness; depending on which loans you consolidate. This could quickly add up over time! Additionally, consolidating could cause you to miss out on these important opportunities for repayment if it causes capitalization of unpaid interest from original balances to increase principal payments significantly faster.
Consolidating student loans will reset the clock on loan forgiveness, meaning you’ll start making payments for your new debt while still in school or early in your career. While consolidating could help accelerate repayment, it is essential that you fully comprehend any implications before applying for direct consolidation loan consolidations.
Reduce monthly payments with an income-based repayment plan or refinancing your private loans; however, these strategies won’t work as effectively as simply paying off student loans prior to consolidating.
2. Reduced Interest Rates
Consolidation could make budgeting simpler if your loan has variable rates; however, extending repayment terms could increase overall costs associated with your loan.
Consolidation may alter the type of loans you hold. If your mix includes both private and federal loans, consolidation may result in different terms and interest rates than previously. Although this could potentially save money over time, it’s essential that you carefully evaluate all available options before moving forward with consolidation.
One of the primary goals of consolidation student loans is to gain a more accurate picture of your total loan debt and how it has changed over time. Consolidation can also help you track payments more closely while staying abreast of information from your servicer.
Consolidation also offers more flexible repayment options, such as income-driven plans. This makes paying back loans more manageable, and may help qualify you for forgiveness programs such as Public Service Loan Forgiveness.
Consolidation gives you the option of switching loan servicers in order to ensure more convenient and effective management of your debt. If your current servicer has caused issues for you, this could be an effective solution to simplify things further.
Consolidation has some drawbacks that you should keep in mind, such as losing borrower benefits such as an interest rate discount or principal rebate that were available with your original loans. Unfortunately, they will no longer apply to the new consolidated loan and capitalised interest may even be added back onto it; meaning you’ll pay interest over and above what would otherwise have been your actual principal amount owed.
If you are near to paying off your federal student loans, consolidating may not be in your best interests. A longer repayment period for the new consolidation loan could increase interest payments significantly and cause greater expenses overall.
3. Consolidation Can Help You Avoid Default
Maintaining multiple loans can be a complex task. Consolidation or refinancing can make things simpler by consolidating all your payments into one manageable monthly installment that’s easier to keep up with and help prevent default by making consistent payments each month, protecting your credit report from missed or late payments and protecting it in turn.
Defaulted loans may benefit from consolidation by changing terms and lowering monthly payments, as well as reinstating benefits such as deferment, forbearance and income-driven repayment plans that would have otherwise been lost when you went into default.
To be eligible for student loan consolidation, you must be current on all federal student debt and possess an excellent credit history. Keep in mind that consolidation does not eliminate defaulted loans from your credit report and that they will remain as “defaulted” until satisfactory payment arrangements have been reached with their holder.
Note that consolidating federal loans may cause the outstanding interest to become part of your new principal balance and may increase overall debt levels. Furthermore, consolidating could allow you to reset any available deferment and forbearance time on existing loans that you might currently have available to you by consolidating them all at once.
Lastly, when consolidating loans using an income-driven repayment plan or PSLF, any qualifying payments you made towards existing loans will no longer count toward qualifying payments made on the new Direct Consolidation Loan and will revert back to statutory interest rates for a new Direct Consolidation Loan. If you choose a private lender instead, these rules may no longer apply.
Consolidating student loans has both advantages and drawbacks, but for many borrowers it can be an efficient way to ease the repayment of debt. If you’re interested in loan consolidation options, it would be prudent to gather up all relevant loan documents as soon as possible and begin researching rates.
4. More Repayment Options
Consolidation offers many advantages for borrowers. One benefit is being able to select a repayment period more suitable to your financial circumstances; this could either be seen as positive or negative depending on the needs of each borrower; choosing longer repayment terms could reduce monthly payments while simultaneously increasing overall interest costs over the life of your loan.
When applying for a Direct Consolidation Loan, you’ll be asked to select your repayment plan. If you need help making this choice, the Department of Education offers a loan calculator which can assist with this decision and help determine how various repayment plans would impact your monthly payment and total debt over time.
If your federal student loans have variable interest rates, consolidating can provide a fixed rate and consistent monthly payment. Keep in mind, however, that only federal student loans can be consolidated using a Direct Consolidation Loan; refinancing may be more suitable in some instances.
Assuming you qualify, consolidating your loans allows you to keep all federal benefits like forbearance and income-driven repayment options intact. Furthermore, the Direct Consolidation Loan application will show which federal loans may be combined and which ones won’t.
As soon as you’ve completed the consolidation process, you’ll have one Direct Consolidation Loan from one loan service provider and this should make tracking your repayment status and payments simpler.
Repaying student loans requires being proactive about keeping your payments current and communicating with your lender. To learn more, visit Financial Wellness @ Penn’s Student Loan Repayment and Forgiveness Resource Center or use our Student Loan Repayment Calculator; and don’t hesitate to reach out if any questions arise – our team is always more than willing to help students and borrowers like yourself understand all their options when it comes to student loan repayment!