I’m up to my eyeballs in it and considering consolidation. It may sound like a scary word for you new borrowers out there, but, like it or not, loan consolidation may be necessary if you’re having a hard time keeping up with your student loan payments. But keep in mind, it’s not right for everybody.
Here are five points you must consider before choosing student loan consolidation.
Only consider consolidating if you’re struggling: Firstly, consolidation works by gathering all of your loans into one loan, lender and repayment plan. Consolidation often lowers your monthly payment, and you will also have one single rate because consolidation averages out the interest rates of your previous unconsolidated loans. If writing five or six checks a month is a major problem for you, maybe consolidation is necessary. But if you’re not troubled by those payment deadlines, consolidation won’t do you any good, said Mark Kantrowitz, publisher of FinAid, a website that tracks the college financial aid industry.
Consolidation could cause interest rates to increase: “The consolidated loan isn’t just a weighted average of all the interest rates,” says Kantrowitz. “It’s actually rounded up to the nearest one-eighth of a percentage point.”
Most graduates think that by consolidating, they are actually lowering their interest rates, but that’s not the truth in every case. For instance, if you decided to consolidate several Stafford loans, which have an interest rate of 6.8 percent, your new rate would be 6.875 percent after consolidation.
Private and federal loans don’t mix: Private and federal loans cannot be consolidated together. So if you have both, you’re going to have more than one monthly student loan payment.
Consolidation opens doors: If you decide to consolidate, you may also be eligible several other repayment plans. For instance, students with federal loans can choose the new income-based repayment plan. The repayment plan makes your monthly payment cap at a certain amount based on your income.
Consolidating federal loans isn’t what it used to be: After July of 2006, all federal loan’s interest became fixed. Before, the interest rates were variable and borrowers could lock in a rate that was lower than what they were getting with unconsolidated loans.
Currently, “there is no financial benefit to consolidating federal loans other than having a single monthly payment and access to alternative repayment plans,” Kantrowitz said.