Should I Consolidate My Student Loans?

Student loan consolidation is one of the most practical ways to avoid defaulting, which can negatively impact your finances in a big way. If you’re struggling to pay your education loans and facing imminent default, consolidation can provide significant financial relief.

To consolidate your student loans, you merge multiple student loans together by taking out a new, bigger loan. You then use the new loan to pay off all your smaller existing ones. You can combine federal student loans and private student loans this way.

You might want to consolidate your student loans now, but this option may not always be in your best interest. There are some essential factors to consider. You don’t want to push back an already big debt to a later time that may involve other overwhelming financial responsibilities, such as car loans and mortgages.

Here are some points to help you decide if student loan consolidation can work for you.

Are You Missing Your Loan Repayments?

Consolidating your student debts can help you avoid default, which occurs when you fail to repay your loans. It can provide relief if you’re consistently unable to keep up with the payment schedules for multiple loans. This option is worth considering if you have multiple missed payments.

Failing to repay your debts can have serious consequences for you and result in a low credit score. Your credit report will retain the poor rating for seven years.

Defaulting on a debt also takes away your qualification for other types of lending. You may be unable to qualify for a mortgage or car loan, making it difficult or impossible to become a homeowner.

If you believe combining all your loans into one will simplify the repayment process for you, consider debt consolidation.

Can You Get a Fixed Interest Rate?

If you have multiple loans from various lenders, you’re probably repaying them at variable interest rates. A single, harmonized repayment plan comes with a fixed interest rate. This rate applies throughout the life of your new student loan.

Your prospective lender will calculate the new rate based on the weighted average of the combined loans. Before signing on the dotted line, ensure that the rate is reasonable and read through all the terms and conditions.

Are You Willing to Pay More Interest Over Time?

Assess the long-term financial impact of any proposed new loan. Consolidation works because it simplifies the process since you only need to make a single payment each month.

However, some of the comforts from loan consolidation may come from extending the repayment duration. The more extended period could mean you will pay a lot more in interest over time. It’s essential to weigh the immediate benefits of consolidation against future financial effects.

Take into account mortgage applications, car loans, and other potential financial obligations 10, 15, 20, or more years from now. You can also look at the average of the interest rates now and consider whether they have increased or decreased since taking out your initial loans.

Evaluate the potential burden and long-term impact on your finances of paying your student loan for 20 to 30 years. You might be able to save money by paying it off in a shorter period.

Student loan consolidation

Will You Lose Benefits on Other Loans?

You don’t have to consolidate all your student loans, even if they’re all eligible for consolidation. You could lose some benefits in doing so. If you are part of the public service loan forgiveness program, the Department of Education advises against consolidating Direct Loans with other types of federal student loans.

If you have a federal Perkins loan, you may be eligible for specific cancellation benefits. Working borrowers, such as police officers and firefighters, can have their entire Perkins loan written off if they satisfy certain conditions. But consolidating such a loan might deny you those perks, in which case, leaving the debt out of your federal student loan consolidation plan makes sense.

A lender may give you some benefits if they think you’re a good borrower, including discounts for auto-payments. It usually helps to explore multiple lenders and consolidate with the one offering your desired benefits.

Can You Push Back the Loan Repayment Duration?

Debt consolidation results in a new loan, giving you some breathing space before you start making repayments. It’s a great option when specific circumstances prevent you from making payments toward your student loans.

If you’re eligible, you may get up to three years of breathing space, during which you can defer payments at intervals of six months. This duration may be sufficient for you to put your finances together and start paying down your debt.

Is Your Loan Eligible for Consolidation?

The Department of Education lets you consolidate any type of federal student loan. State or private loans aren’t eligible for this consolidation program, meaning you can’t have a single repayment plan for a bank loan and a federal loan under this program.

Refinancing, rather than consolidating, is usually the better option for borrowers in this scenario. This option lets you access financing for a mixture of private and federal student loans. At T&I Credit Union, we offer several refinancing options for students looking to make their debt more manageable.

What is the Cost of Consolidating?

Eligible consolidation loan borrowers don’t have to pay any origination fees. The only significant cost involved in consolidation comes from paying the interest.

Consider the Monthly Payments

A student loan consolidation package should include a manageable monthly repayment plan. When choosing your private lender, look for the one that offers better interest rates. A credit union may give you a student loan refinancing option with lower rates, which translates to lower monthly payments.

You may also qualify for lower interest rates and monthly payments with a federal direct consolidation loan. This option works if you’re eligible for any of the government-run income-driven repayment plans.

Do You Have a Sound Repayment Plan?

Your student loans don’t go away when you consolidate them. You’ll still have to continue paying them. Lenders agree to consolidate your student loans with the expectation that you’ll fix your financial circumstances within the repayment period.

It’s essential to come up with a practical repayment plan. Options to improve your finances include getting a job or looking for a second, part-time job, working overtime, or finding ways to save money.

Availability of Multiple Repayment Plans

A difficult repayment plan will complicate your efforts to pay off your student loan debt. Consolidation might offer the financial relief you need. With a federal consolidated loan, you may choose from multiple repayment plans depending on your financial situation and eligibility.

Federal student loan consolidation also lets you change repayment plans at your convenience. However, private lenders like credit unions can also offer flexibility by allowing you to choose the duration of your loan.

Assess Costs and Benefits Before Consolidating Your Student Loans

Before making an irreversible commitment, consider the pros and cons of student loan consolidation. Look at interest rates, repayment duration, and the effect of defaulting on your credit score.

At T&I Credit Union, we offer affordable student loan consolidation packages. Contact us to discuss a personalized debt refinancing solution.

About Jamie Fraser

Jamie graduated from a little ivy in the North East with a major in history and minors in economics and classics. He has a strong interest in finance and is a life-long investor. His interests include soccer, ice hockey, and visiting museums.

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