A college education is not cheap, especially if you are not sponsored. When it comes to student loans, nothing is guaranteed. However, you are good if you know how and why you should combine student loans. While the application process is long and tedious, the fine print is confusing. Therefore, understanding the benefits and drawbacks of consolidating student loans is vital. If all the money you borrowed was federal loans, applying for a direct consolidation loan is the best option. However, if all or some of the student loans were from private lenders, consider using a refinancing program to get easier repayment options.
Subsidized and Unsubsidized Loans
Subsidized loans do not accrue any interest if the student is in school or deferred, while unsubsidized student loans are for undergraduate and graduate students and are not based on financial aid. Before applying for a student loan, thorough research is required to make the right decision. While there are benefits of consolidating student loans, there are some drawbacks, especially if you have already started making payments toward the income-driven repayment loan forgiveness.
Pros of Direct Loan Consolidation
Fixed interest rate
If you have several student loans, there is a high possibility you have different interest rates. However, when you consolidate the loans, you have one fixed interest rate. The fixed interest rate is the average of all the interest rates rounded up to 1/8th of 1 percent.
Multiple repayment plans
With a consolidated student loan program, the borrower can choose a repayment plan that suits their needs. Some options available include standard, extended, graduated and income based.
Lower payments
With extended repayment plans, the loan term is extended from 10 years to 15 or 20 years. An extended loan repayment period lowers the monthly repayments. Borrowers can get reduced interest rates reducing monthly payments.
One payment
When you consolidate all your federal loans, they will be serviced by one lending institution; hence, you need to make only one monthly payment. One monthly payment saves time and energy, especially if you send payments through the mail.
Protecting credit
Failing or missing to make monthly payments negatively affects your credit score. It is easy to forget to make monthly payments if you have several loans. However, if you are required to make only one monthly payment, you can protect your credit score.
Reliability
Typically, there is no minimum amount to qualify for a Direct Consolidation Loan, and no maximum amount of loan cannot be consolidated.
Avoid default
Consolidating student loans helps the borrower change the loan terms and lower interest rates and monthly payments. Therefore, if you are struggling to make monthly payments, combining student loans helps you avoid failing or missing to make agreed payments.
Cons of Student Loan Consolidation
Pay more in interest
Extending the loan terms translates to paying more interest in the long run. Paying a student loan faster saves time and money.
Losing some benefits
Borrowers lose some benefits when they combine their student loans. For example, consolidating student loans means it will take longer to qualify if you made payments to Public Service Loan Forgiveness.
Losing lender benefits
Some lenders have good terms and conditions, like reducing the interest rates if you meet certain repayment conditions. When you combine the loans, you lose such benefits.
There is no private loan consolidation
If you applied for student loans from a private institution or lender, you can’t apply for the Federal Consolidation loan program. Sometimes, private lenders allow student loan consolidation, but their interest rates are very high.
Combined interest rates
The new interest rate is determined by the average interest rates of the loan amount you owe with an additional 0.125%. If some of the loans have a higher interest rate, your average interest rate will be higher too.
Conclusion
If you have missed monthly payments because you are paying several lenders with different repayment terms and dates, refinancing or consolidating the loans is the best option. Making a single payment each month is more manageable than paying several lenders. However, read the Terms and Conditions of the loans you owe before consolidating your loans.