There are definitely benefits to student loan consolidation. Obviously, you’ll only have to worry about one monthly payment, and if you have strong credit, you might be able to find a lower interest rate when consolidating or refinance your student loans.
However, student loan consolidation also has its drawbacks and is not a smart move for everyone. Here are seven reasons why you might be better off leaving your student loans as they are.
1. Refund options may not be as flexible
If you use a private student lender to consolidate your loans, you generally agree to a single repayment schedule for the entire term of the loan. Federal borrowers can choose a standard 10-year repayment plan or an extended term, but they also have the option of taking advantage of unique and potentially cost-effective options such as the Pay As You Earn plan or other repayment options based on Income.
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If you get a federal direct consolidation loan, you still qualify for these alternative repayment plans. However, it is important to note that by consolidating, you will lose any credit you have already earned for canceling the income-based repayment plan. For example, the Pay As You Earn plan offers forgiveness of any remaining balance after 20 years of one-time payments. So if you have already made several years of payments under the scheme, you are in effect starting the clock again.
2. You may lose the opportunity to get a postponement or abstention
Private Student Loan Consolidation has become much more prevalent in recent years. However, it is important to realize that there are certain hardship options (deferment and forbearance) that are unlikely to be offered by a private lender. These allow you to defer payments if you’re having financial difficulty, so if you don’t have a solid source of income, you might want to think twice before losing this option.
3. You cannot repay your loans selectively
When you have multiple individual student loans, you have the ability to pay off your highest interest loans faster. As a personal example, I have separate student loans for each semester I was in school. These loans have interest rates ranging from 5.75% to 6.75%. When I want to pay extra for my student loans, I have the option of applying the payment to the higher rate loans to maximize my interest savings. If I had to consolidate my student loans, I would lose this option.
4. You are in your grace period
With most student loans, you have a six-month grace period after leaving school before you have to start repaying your loans. Consolidation loans do not have such a window and generally require repayment beginning approximately two months after loan approval. In other words, if you just graduated and are applying for a consolidation loan, you should be ready to start making payments much sooner.
5. You’ve already been paying your loans for a while
When you consolidate your loans, the repayment period of your loan starts again or could even lengthen. Many borrowers are attracted to consolidation because it often results in a lower monthly payment. However, you will end up repaying your loans for a longer period of time, especially if you have already been repaying your loans for a while.
6. You work in the public service or you are a teacher
Federal student loans have pretty generous remission programs if you qualify. Teachers can apply for up to $17,500 in loan forgiveness after five successful years of classroom teaching, and public service employees can apply for forgiveness of any remaining balance after 10 years of one-time payments in a repayment plan eligible. Private student loans generally do not have similar forgiveness programs.
Even if you decide to consolidate your loans through a Federal Direct Consolidation Loan, it is important to realize that any progress you have made towards the cancellation of Public Service Loans (PSLF) will cause the government to restart. 10 year clock.
7. Your student loans may have a lower interest rate than you may find elsewhere
If you are applying for a consolidation loan from a private lender, your new interest rate will be based on factors such as your credit history, length of repayment and the interest rates currently available from your lender. Your federal student loans have a fixed interest rate that’s usually on the lower end of the spectrum, so chances are you won’t find a better interest rate through a private lender.
On the other hand, if you are using a federal direct consolidation loan, a weighted average of your loan interest rates will be taken and then adjusted upward by 0.125%. Although this is a small difference, it is important to know that you will pay a little more interest by consolidating.
Also, if you have accrued unpaid interest on the loans you are consolidating, it will be added to the principal balance. So your future interest will be calculated on a larger principal balance than before.
To reiterate, there are definitely benefits to consolidating or refinancing your student loans. However, if any of the situations described here apply to you, you might want to think twice.
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