When you are desperate to get to the bottom of your student loan debt, it is easy to think that student loan consolidation is one of the best ways to reduce the overall amount of interest you pay over the life of the loan and get you on the fast track to debt-free living.
The extent to which student loan consolidation is optimal, however, really depends on your particular student loan specifics.
So, before you embark on consolidating your student loans whether they are federal or private, think about the benefits and drawbacks of student loan consolidation.
Reasons To Consolidate Your Federal Loans
Consolidate if you are truly having trouble keeping up with all your different payments. If you do consolidate your federal loans, you’ll have to choose your repayment plan when you do so, which includes the Extended Repayment Plan, Pay as You Earn (PAYE), Income-Contingent Repayment, and Income-Based Repayment. Many of these options may reduce your monthly payments, but also create a longer payback period, meaning that you will pay more interest over the life of the loan. So, be sure to compare your current monthly payments to what monthly payments would be if you consolidated your loans.
What to Know About Federal Student Loan Consolidation
The great thing about consolidation is that it takes all of your federal loans, averages the interest rates, and centralizes payment, making it easy to keep up with repayment. You’ll be able to switch your variable interest rate loans to a fixed interest rate as well. This interest rate is fixed for the life of the loan and is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. There is no cap on the interest rate.
It is important to know, though, that you can’t undo the consolidation once it is done. That means you should carefully time consolidation especially if you are eligible for borrower benefits from your original loan, which may include interest rate discounts, principal rebates, or some loan cancellation benefits, which can significantly reduce the cost of repaying your loans. You might lose those benefits if you consolidate.
What to Know About Private Loan Consolidation
Private loans cannot be consolidated with your federal loans, but you may be able to consolidate the private loans together into one payment. This could work for you if your credit has improved by 50 or more points since you took out the loan, which means you could get a lower interest rate. Like federal loan consolidation, private loan consolidation can work for you if you have several different loans, and you’re having trouble keeping track of your payments. Similarly, consolidate your private loans if you want to spread out repayment over a longer period of time to lower your monthly payment. Don’t forget, though, a lower monthly payment usually translates into accruing more interest over the life of the loan.
The sad news is that there are no loan forgiveness programs for private student loans, but here is a list of organizations that consolidate private student loans at http://www.finaid.org/loans/privateconsolidation.phtml.
In addition to consolidation, there are refinancing options and debt reduction programs for private loan lenders which I will share in an upcoming column.
In other words, there is hope.
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