Should I consolidate my student loans?

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By Doug Matus

For many people, student loans rival home mortgages as the largest debts they will ever accrue. Those with large amounts of student debt are not powerless, however, and options such as consolidation exist to make payments manageable.

Though consolidation can seem complicated, it’s meant to simplify the loan repayment process. If you’re on the fence about whether to consolidate your loans, consider the following before you make your decision.

Types of consolidation

Most student borrowers take out multiple loans over the course of their studies. If you pursue post-graduate work, it’s not uncommon to lose track of the number of loans you’ve taken out, much less the total amount. Multiple payments each and every month are not only difficult to manage, but can put a serious drain on your finances.

The consolidation of student loans — when multiple loans get combined into a single monthly payment — can occur through federal loan services or private lenders.

Federal consolidation only works with federal loans. In this scenario, the lender — the federal government — combines your loans and assigns them a 10-30 year repayment plan. The interest rate gets set according to the average of each loan’s rate.

Private consolidation, also known as refinancing, is available for federal and private loans. In this scenario, a private lender pays off your loans through the issuance of a new loan. These loans derive their rates from the borrower’s credit history, so those with high scores can benefit from lower interest.

Benefits of consolidation

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Both types of consolidation come with benefits and drawbacks. The benefits of federal consolidation derive mostly from favorable repayment plans.

“With the federal consolidation loan, you may only consolidate federal loans, no private ones,” says Jeffrey Mapes of Mapes Law Offices. “It will often lower your interest rate, give you one monthly payment instead of several, and allow you to take advantage of income-based repayment plans.”

Income-based plans ensure that your payments remain manageable. If your income falls, so do your payments, and the balances get forgiven after 20-25 years. Federal consolidation also allows for loan forgiveness under the Public Service Loan Forgiveness program.

The benefits of private consolidation revolve around the availability of low-interest rates. If you make enough money to pay off your loans, you can save a great deal thanks to refinancing. If you have good credit and stable employment, chances are you can refinance your loans under better terms, with a shortened repayment schedule.

Cons of consolidation

If you struggle under loan payments, consolidation can seem like a godsend; it’s important to recognize the drawbacks, however.

For federal consolidation, interest rates often do not lower. Monthly payments can decrease, but only thanks to an extended repayment schedule. If you plan to repay your loans, federal consolidation can actually increase the overall amount you pay.

Private consolidation also has the potential for pitfalls. Since saving money is the primary reason for a private consolidation, borrowers must remain wary of hidden costs.

“Borrowers should make sure that their new loan has a fixed interest rate,” says Leslie Tayne of Tayne Law Group. “They should also be careful that they are not receiving a higher interest rate. If their new term is longer, borrowers could end up paying more interest in the end.”

If you refinance federal loans with a private lender, you could wind up "shooting yourself in the foot."

“The biggest mistake any borrower could make is to consolidate federal loans with a private lender,” says Jeffrey Mapes. “While you may get a better interest rate, you are forfeiting all of the benefits that you receive with a federal loan.”

With private student loan consolidations, you lose access to federal forgiveness and benefit programs, such as income-based repayment. This means that, in the event of a personal financial downturn, you will find yourself stuck with the full amount of your loan payments. Keep in mind the impact of student loan repayment on credit scores.

Bottom line

At the end of the day, whether or not to consolidate depends on many personal and financial factors. The first step to making any decision is to do your research and know your options. Once you’ve weighed all the benefits and drawbacks, you can decide whether consolidation works for you.

Either way, you can work toward a future unclouded with the burden of student debt.

About the author

Doug Matus is a freelance writer.

Written on March 15, 2016

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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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