Loan Consolidation
Student loan consolidation is an option provided to borrowers of federal funds for postsecondary education under the Higher Education Act (HEA). Both the Federal Family Education Loan (FFEL) Program and the Direct Loan Program have provisions for this option. When student loans are consolidated, all federal student loans owned by the borrower are actually paid off and a new loan is created. This creates many changes in the terms of loan repayment and in the borrower’s protections as well. If this is a route you are considering, read on to learn about the pros and cons of loan consolidation, as well as some other options available to you.
Student Loan Consolidation Considerations
Loan consolidation is just one option to consider when determining how to pay back your student loans. If you are weighing the potential benefits of loan consolidation, you may want to be sure you are well versed in the different loan repayment options as well, as many times you can find a repayment plan that is a better fit to your needs than loan consolidation.
- Standard monthly payment: covers part of the principal as well as part of the interest of your loans, but often times requires individuals to make payments to multiple lenders, there are often multiple loans acquired throughout a student’s time in school to cover the associated costs of education
- Graduated repayment plan: allows borrowers to make lower monthly payments for a set amount of time at the beginning of repayment, and higher payments at a later date when they may be in a more financially stable situation
- Income sensitive payment plans: monthly payment amount is based on the borrower’s current income level, and can fluctuate as income changes
On top of these different payment options, many loans get sold to various lenders, which results in the borrower having to pay multiple lenders by multiple monthly payments. Because repayment can get so complicated, many borrowers decide to consider loan consolidation, in order to simplify their loan payments. When loans are consolidated, all of your individual federal student loans are consolidated into one loan, and put on only one monthly payment plan. The interest is determined by taking the average of all existing interest rates on your multiple loans, and rounding up to the nearest one-eighth of a percent. If you are considering loan consolidation, there are many factors to take into account before deciding to take this route of repayment. Take a look at the pros and cons listed below to determine if loan consolidation might be a route worth considering.
Pros of student loan consolidation:
- Can greatly simplify the repayment process, by allowing for one monthly payment to made to just one lender
- Can significantly lower monthly payments
As mentioned previously, making multiple monthly payments to various lenders can become complicated, and many people who are not extremely organized end up missing payments, which can put them in default and have negative effects on their personal credit. Loan consolidation eliminates the hassle of multiple monthly payments, making it much easier to keep track of payments. The added benefit of lower monthly payments can relieve some financial pressure if you were previously having trouble making your scheduled monthly payments.
Cons of student loan consolidation:
- Can lead to a greater cost to you over the life of your loan
- Potentially nullifies any previously existing borrower benefits offered by the original lenders
While the time of loan repayment is extended in the process of loan consolidation, you end up paying more interest on your loan over the length of this time. In fact, some loan consolidation plans even allow up to 30 years for repayment, versus the standard 10 years normally allowed, resulting in an additional 20 years of interest payments. Another consideration is that by going with loan consolidation, you will lose any borrower benefits offered by your original payment plans. Common borrower benefits are loan cancellation benefits, interest rate discounts, and even principal rebates. All of these benefits can help lower the total cost of your loan, but if you decide to go with loan consolidation, you run the risk of losing these benefits.
Overall, loan consolidation is not a solution for everyone, but can have some undeniable benefits for individuals in certain financial situations. If you are considering this option, it is best to figure out exactly how much you are able to pay monthly, determine if your current payments exceed your payment abilities, and weigh your options from there. While loan consolidation is just one option, it does work to simplify monthly payments and help keep your repayment plan on track.
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