Benefits and Drawbacks of Consolidating Your Student Loans

Repayment of your federal loans is made simpler by consolidating them into one loan with a single servicer and one monthly payment. It does, however, also lengthen your term and may result in higher interest payments. Additionally, consolidating doesn't rob you of crucial federal protections like loan forgiveness, in contrast to refinancing with a private lender. Here are three scenarios in which consolidation would be appropriate and a few more in which it wouldn't.

1. Reduced Monthly Instalments

Consolidating your debts could result in cheaper monthly payments if you have several loans with various interest rates and pay schedules. This is particularly valid if you decide to give your consolidation loan a longer duration. But be advised that any outstanding interest will be capitalized during consolidation and added to your new principle amount. You can end up paying more interest overall as a result of this than if you hadn't combined. Additionally, you could no longer be eligible for income-driven repayment plans or loan forgiveness for public service if you decide to combine your federal student loans with those from a commercial lender. Prior to selecting loan consolidation, it is crucial to take these possible effects into account. On the Federal Student Aid website, you can apply for a direct consolidation loan for free in as little as 30 minutes.

2. Decreased Loan Interest Rates

Usually, when you consolidate your student loans, your variable interest rate becomes fixed. You may feel more at ease knowing that your monthly payments won't go up as a result. Additionally, you might be eligible for repayment plans like income-driven repayment alternatives or public service loan forgiveness, which can further lower your monthly payments. If you lower your interest rate, you might pay less interest overall, but you might also be in debt for a longer period of time. Depending on your demands right now, this could be a benefit or a drawback. You'll be able to handle and keep track of just one monthly payment by combining them. It might be simpler to stay on top of your payments and stay away from late fees as a result. It might also make it easier to submit an application for financial assistance in the future.

3. Easier to Handle

While managing your student loans may be made easier by combining them into a single loan with a single monthly payment and a fixed interest rate, doing so also restricts your access to some advantages and safeguards. For instance, even if you select an income-based repayment plan for your new loan, you might no longer be eligible for the PSLF program or the student loan interest deduction if you combine your FFEL and Perkins loans into a direct consolidation loan. Furthermore, the interest rate on your consolidated loan will be fixed and determined by averaging the weights of the individual loans you consolidated, with the results rounded to the nearest eighth of a percent. As your principle balance increases over time, you may ultimately incur greater costs as a result of this. Additionally, any unpaid interest capitalizes, which means that the main amount of your new loan includes it.

4. There are no second chances.

Because consolidation eliminates missing payments, it can assist debtors in avoiding default. It may, however, also lengthen the time that borrowers have to return their debts, which could result in higher interest rates and longer loan payback terms. Any unpaid interest capitalizes and is added to the new principal balance when loans are consolidated. The borrower's credit score should rise if the new loan is then returned on schedule. Federal loans that are currently in default may also be consolidated in order to reinstate the borrower's eligibility for income-driven repayment plans and public service loan forgiveness, although doing so will probably result in the loss of any progress made toward the forgiveness program. To find out more, speak with your loan servicer.

5. Steer clear of default

A significant occurrence, a default, might result in loan sums being written off, which will lower your credit score. Paying back many loans at once can make it easier to stay on top of your payments and prevent a default. Consider setting up an automated monthly deduction from your bank account to make the payment if you are concerned about skipping payments. Additionally, if you consolidate, your loan term may be extended, resulting in higher interest rates over the course of the new loan. If you're concerned about facing financial difficulties, this is not a wise move because the longer loan term will just postpone the moment when you'll need to make larger payments. Consolidation can assist you in restoring your federal loan credit if you have fallen behind on payments for three straight months or if you choose to sign up for an income-driven repayment plan.