Should I Consolidate My Student Loans?
Consolidating your student loans may lower your payment. Compare the benefits and drawbacks to decide whether you should consolidate your student loans.
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Student loan repayments officially resumed this past October after being paused for three and a half years. With inflation and high interest rates, it's no surprise that many borrowers are struggling to make payments.
If you're feeling the burden of student loan repayment, one solution is consolidation. By consolidating your student loans, you combine multiple loans into a single loan with a new interest rate, repayment terms, and lower payment.
Student loan consolidation has some drawbacks, so it's not the best choice for everyone. There are some key factors that can help you determine whether you should consolidate your student loans.
You have multiple loans.
Managing multiple student loans can be confusing and time-consuming. You'll have to keep track of multiple lenders, payment amounts, and due dates. Consolidating your student loans makes it easier to budget and keep track of your payments by combining all your loans so you end up with just one monthly payment.
Your consolidation options vary depending on the types of loans you have. Federal loan consolidation is only available for Federal student loans. Private student loan consolidation can be used for both Federal and private student loans. If you have both types of loans, you don't have to consolidate them together, especially if it won't leave you in a better situation.
You can't afford your monthly payments.
Consolidating your student loans can potentially lower your monthly payments by lowering your interest rate or extending the repayment term, or both. While lower monthly payments may be easier on your budget, a longer payment term can increase the amount of interest you pay over the life of the loan.
Before consolidating, take a good look at your current financial situation, including your current budget and future earning potential. Rule out other options, like increasing your income or lowering your expenses, before moving forward.
You have a variable interest rate.
Having a variable interest rate means your payments are sensitive to rate changes. Your student loan payments may fluctuate, making it harder to budget and manage payments. Consolidating allows you to convert your loans to a fixed-rate loan with stable, predictable monthly payments.
Compare your existing student loan interest rates to the current rates for consolidation loans. If the new rate is higher, consolidation may not be beneficial long-term. Accepting a higher interest rate may cost you more interest, especially if you currently have unpaid interest.
When you consolidate your loans, unpaid interest is added to your balance, increasing your loan amount. Your future interest will be charged on the higher balance and a higher interest rate makes the loan more expensive.
Your loans are in default.
Defaulting on your student loans can have consequences, including damage to your FICO® Scores and risk of wage garnishment. Consolidating your federal student loans can bring your loans out of default and give you an opportunity to get back on track with your payments. With a direct consolidation loan, you only need to make three consecutive on-time payments or agree to get on an income-driven repayment plan to apply for consolidation.
Should You Consolidate Your Student Loans?
Consolidating student loans can make it easier to manage your loans and monthly payment. However, if you consolidate with a longer repayment term, repaying your student loans could become more costly overall. Before moving forward with consolidation, explore other options like deferment, forbearance, and income-driven repayment plans. These may provide the relief you need without the long-term cost.
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LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.