Student loan consolidation is a way to combine all your federal student loans into one. It makes paying off your debt simpler and may even lower your monthly payments.
However, consolidation can come with some negative consequences. These include losing some borrower benefits. It also increases the total interest paid over the life of your loan.
Interest Rates
Student loan consolidation can help borrowers simplify their payments, but it also comes with some drawbacks. In addition to lengthening repayment periods and paying more interest over the life of the loan, federal student loan consolidation may result in losing borrower benefits such as interest rate discounts or principal rebates. Consolidation may also cause a borrower to lose credit for qualifying payments toward income-driven repayment or Public Service Loan Forgiveness.
The only way to consolidate federal student loans is through the Direct Consolidation Loan program, which allows borrowers to combine their existing federal student loans into a single new loan. There are no application fees and the resulting interest rate is the weighted average of all the loan rates on the loans being consolidated, rounded to the nearest 1/8 of a percent.
While federal student loan consolidation does not save borrowers money, it does allow them to keep their federal protection benefits, including income-driven repayment and Public Service Loan Forgiveness. However, it’s important to note that there is no guarantee that a borrower will be able to qualify for any of these programs after consolidating their loans.
Another concern is that the interest on any loans in default (usually because of deferment or forbearance) will be added to the original principal balance of a consolidated loan, which can make repaying more difficult. Unpaid interest can also be rolled into a new loan, lowering the original amount of the loan and increasing the total amount of interest paid over the life of the loan.
If you decide to consolidate your student loans, you should consider the following factors:
Interest rates are a major consideration for most students. They can be incredibly expensive, especially for students who aren’t earning much money and have high debt-to-income ratios.
The only way to ensure that you’re getting a good deal is to shop around. Fortunately, there are many lenders who offer competitive rates for both federal and private loans.
Depending on the lender, interest rates can vary between 3% and over 8%, with the lowest rates being available to creditworthy applicants with excellent credit. These rates often require creditworthy co-signers, graduate degrees and shorter repayment terms (terms vary by lender).
While there are advantages to consolidating your student loans, you should be sure to weigh the pros and cons carefully before making a decision. You’ll want to find a solution that fits your specific needs, and the right loan can make all the difference.
Payments
If you have student loans with multiple servicers, each with a different interest rate and repayment term, consolidating your debt into one loan can be an excellent way to make your payments simpler and easier to manage. However, if you choose to consolidate your loans, it’s important to consider the cost of consolidation.
Reduced monthly payments: Consolidating your student loans may lower your monthly payment by extending the repayment period or providing you with a lower interest rate. But this will mean that you’ll be paying your loan for a longer period of time, which can negatively impact other areas of your budget.
Simpler bills: With a single loan to worry about, your monthly payments will be much easier to manage and pay down faster. You’ll also be able to take advantage of federal benefits, such as deferment or forbearance, that you might not be able to retain when you consolidate with a private lender.
But don’t forget about the cost of consolidation: It will add up fast, especially if you have a large number of federal loans. In addition, if you consolidate your debt, your current interest rates will be averaged together to create your new interest rate.
No do-overs: Once you consolidate your loans, you can’t go back and change the terms of your new loan. This is because your loans will be consolidated into a single loan, so it makes no sense to consolidate and then try to make a new loan with a different lender.
Repaying defaulted student loans: If you already have defaulted federal student loans, you can still consolidate them with a Direct Consolidation Loan. But you’ll have to agree to a new income-driven repayment plan or make three voluntary, on-time and full monthly payments on the defaulted loans before you can consolidate them.
Lose eligibility for public service loan forgiveness: If you are a public service employee and have been making qualifying payments toward Public Service Loan Forgiveness (PSLF), you can’t consolidate your loans if you have PSLF. You can, however, consolidate your loans and maintain eligibility if you leave out the Direct Loans that were used for PSLF payments.
Repayment Term
Choosing the right repayment term can have a huge impact on how much you have to pay each month and how quickly you’ll pay off your student loan debt. This is especially true for federal student loans, where a longer loan term can help reduce your monthly payments and the total amount of interest you have to pay over the life of the loan.
The most common student loan repayment terms include Standard Repayment, Graduated Repayment and Extended Repayment. They are all available to all borrowers, but they may differ depending on your specific circumstances and long-term financial goals.
For example, under the Standard Repayment Plan, you will make a fixed payment every month and repay your loan in up to 10 years. This plan saves you money because it ensures that you pay off your student loan as fast as possible.
Borrowers can also choose from a variety of other repayment terms to help them manage their debt. For example, income-driven repayment plans take into account your income and family size when determining your monthly payment.
This can help lower your monthly payments and can also allow you to have your remaining balance forgiven after a certain number of months. Regardless of the repayment term you choose, it’s important to make sure that you stay on track with your payments.
To determine how much your monthly payment will be, use Sallie Mae’s student loan payment estimator. This tool calculates your estimated payment based on the amount of your loans, your current interest rate and the repayment period for each.
It is not a guarantee of how much you will pay, and you should contact your lender to get a more accurate estimate. You should also be aware that this calculator does not account for missed or deferred payments, or any required minimum payment amounts for a particular loan.
It’s also important to note that the length of your repayment term will vary depending on the amount of your total education loan indebtedness, which includes both your consolidation loan and any other federal or private student loans you have.
Fees
If you’re struggling to pay off multiple student loans, you may want to consider consolidating them into one loan. This process is free and a great way to simplify your payments. It also can help you avoid default if you’re having trouble making your payments on time.
However, there are some fees associated with consolidating your student loans that you should know about before pursuing this option. These fees can add up over time, and they can negatively impact your overall financial situation.
1. Interest Capitalization:
When you consolidate your federal student loans, any interest owed on them will be added to the principal of your new consolidation loan. This is called interest capitalization, and it can add thousands of dollars to your total repayment amount.
2. Repayment Term:
When you refinance your federal student loans, you can choose to extend the length of your repayment. This can significantly reduce your monthly payments and make it easier to budget for them.
3. Collection Costs:
If you have a federal student loan and you’re in default, your lender may charge you a collection fee. This fee is typically no more than 18.5% of the total outstanding balance on your loan.
4. Loss of Benefits:
Some federal student loans are eligible for income-driven repayment programs or other important benefits that you might lose if you consolidate them. This can include cancellation options, interest rate reductions and principal rebates.
5. Resets the Clock on Student Loan Forgiveness:
If you’re already using the deferment or forbearance options on your federal student loans, combining them with a new consolidation loan will reset that clock. This means that you’ll be able to take advantage of these options again, which can save you a lot of money in the long run.
