If you’re tired of having to pay on several different student loans to a variety of loan servicers, student loan consolidation might be a good option for you. When you get a Direct Consolidation Loan, you basically take multiple or all of your federal student loans and combine them into a single new one. This can be a beneficial program for many people; but it’s also not perfect. Consolidation can also be done with private loans, but this requires additional considerations as well. Here are some of the pros and cons of student loan consolidation.
What are the Pros and Cons of Student Loan Consolidation?
As with essentially all financial products, there are pros and cons to student loan consolidation. It’s important to understand some of these nuances before you make any decision. What’s a good choice for one person isn’t necessarily going to be wise for another one. Let’s start with some of the pros of student loan consolidation:
- You simplify your loan repayment schedule – Those who are used to having to pay multiple loans at different times of moth might want some relief from this constant balancing act—especially those who are living paycheck-to-paycheck or on limited means. Consolidating student loans brings several or all of your loans into a single new one, which can take a lot of the headache out of paying back your debt.
- You can get a longer payback period – When you consolidate your student loans, it’s possible to extend your payback term.
- You can lower your payments – The big benefit of extending your loan repayment period is that it can reduce the amount you owe each month. This is hugely helpful for those who are running on a tight budget and are having trouble affording their current payment amount.
As you can see, consolidating loans can come with a few solid benefits. Without a doubt student loan consolidation can work well for certain individuals. But there are cons to this as well:
- You don’t lower your interest rate – Loans that are consolidated through the federal government will have the set net interest rate as the previous loans represented in them. Lowering you interest rate is typically the best way to save money on a loan over time.
- You might not actually lower your overall costs when you consolidate – For some people, consolidation might obfuscate their problems more than solve them. Since your interest rate isn’t lowered when you consolidate through the federal government, there’s going to be negative effects if you extend the term of the loan. You can actually end up paying significantly more in interest over time this way.
- You can lose federal benefits with private consolidation – Certain federal loan benefits, such as income-driven repayment plans, will go away if you consolidate with a private lender or do a student loan refinance. At the same time, some people might still find this beneficial if a lower interest rate makes up for it and they don’t anticipate qualifying for any highly accreditive repayment programs. This is an essential consideration before you make this choice.
With so many pros and cons to debt consolidation, it can be tough to make a choice. Knowing if there are other options out there can help consumers narrow in on their best option.
Are There Alternatives to Student Loan Consolidation?
There’s usually more than one way of accomplishing something. Paying off your student loans is no different. Those who don’t think consolidation is the right choice for them can think about a more straightforward option: student loan refinancing.
Everything You Need To Run a Successful BusinessWhile consolidation is technically a form of refinancing, it’s important to distinguish between the two when dealing with student loans. This is because refinancing can only be done through a private lender, not the government. But what is refinancing?
When you refinance any kind of debt—from student loans to a mortgage—you’re simply replacing your old loan with a new one, which should ideally have more appealing repayment conditions. Your interest rates don’t change when you consolidate with the government, thus, true refinancing only happens with private lenders.
You can refinance your student loans as many times as you want—and it’s free. These are two highly attractive elements. Again, though, like when you consolidate with a private lender, refinancing student loans means you give up your special federal benefits.
Student loan consolidation can be a great choice for certain borrowers. Other options, however, might be better suited for different people. Understanding the pros and cons of student loan consolidation can help guide you to the right decision.
