Before you jump on the bandwagon and consolidate your student loans, make sure that you know your facts. Consolidation can be a good thing, but you really have to weigh your options to make sure that it is right in your particular situation. A common misconception among student debtors is that there aren’t options when it comes to student loan repayment. The good news is that there are options, and consolidation can be a very viable option. You just have to make sure that you know that facts. Here are a few key points to take into consideration.
Your Interest Rates Could Go Up
You heard right. Consolidation doesn’t always lower your interest rates. In fact, sometimes it can make it go up a bit. When you use a federal consolidation loan to simplify your student loans, they take the weighted average of your interest rates. They then round it up 1/8th of 1%, which can really make a difference. It doesn’t mean that your interest rate will spike to a record high, but it is something to be aware of. You will not save through consolidation as you would with student loan refinancing.
Don’t Consolidate Without Calculating to Make Sure You Will Save
Look for a reputable consolidation calculator to help you calculate your monthly payment based on new terms and new interest rates available through consolidation. Studentloans.gov offers some good calculators that will give you an unbiased number. Many of the calculators will show you how much you will save over the life of the loan. If you aren’t going to save, either over the life of the loan, or on your monthly payments, then it may not be worth it.
Your Loan Terms May Be Increased (More Than You Know)
Did you know that consolidation loans can carry a term of up to 30 years? Who even wants to have to pay on their loans for that long? To avoid this, you can choose a lower term length, but remember that you will have a higher monthly payment. It’s a give and take, depending on what you can afford.
You Can Have Multiple Consolidation Loans
It is a common misconception that you can only get one consolidation loan. This isn’t true. In fact, you are eligible to apply for a new consolidation loan every 180 days. That doesn’t mean that you have to wait 180 days to consolidate again, as the new consolidation will just be combined with the original consolidation loan.
Consolidation May Be Required to Take Advantage of Student Loan Forgiveness Plans
If you plan to use Public Service Loan Forgiveness to help forgive some of your student loans once you have made at least 120 timely payments, you may be required to consolidate your loans. This isn’t the case with every student loan forgiveness program, but is a requirement for the public service workers.
You Don’t Have to Consolidate Every Single Loan, You Can Pick and Choose
Student debtors also don’t know that they don’t have to include all of the student loans into their consolidation loan. While this isn’t usually common, it does happen. This will allow you to possibly consolidate older loans to lower interest rates, while still taking advantage of some of the income based repayment plans that are not available once you consolidate (like the PAYE program). Just remember, if you do this you will need to keep track of the separate repayment plans.
Consolidation Can Be a Good Way to Fix Defaulted Loans
If your loans are in default, chances are it will be easier for you to get them in good standing if you consolidate them. This will not only remove the risk of having your wages garnished, but it will also help to repair your credit. Consolidation loans actually result in your credit report showing the individual loans as being paid off. Once this happens, you can make timely payments on the consolidation loans and help to not only repair your credit, but also keep your loans out of default status.
You May Have Better Options for Repayment After Consolidation
Finally, make sure that you know that your repayment options may be more diverse if you consolidate. You may be able to use the federal government’s REPAYE program. While their PAYE program is not available once you consolidate, the REPAYE (or Revised Pay as You Earn) program can be beneficial.
As you can see, consolidation can have its pros and cons (as with anything really). If you are unsure whether consolidation is for you, I encourage you to weigh your options and consider what you can afford on a monthly basis. Think about consolidation, refinancing, federal repayment programs, student loan forgiveness, and other beneficial resources that are available to help you manage your student loan debt and get it paid off so that you can be a step closer to financial freedom.