When Is Student Loan Consolidation a Bad Idea? Student loan hero


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Student loan consolidation can combine all of your federal loans into one easy monthly payment. Plus, it gives you the option of lowering your monthly payments by extending your repayment term, which can help you get out of the default (or avoid it in the first place).

But while there are benefits, student loan consolidation isn’t always the best option for everyone. Consider the following …

When student loan consolidation is a bad idea

While there are good reasons to pursue this strategy, consolidating student loans is not always a good idea.

Note that we are talking about Direct loan consolidation here, which involves combining your federal loans and choosing a new repayment plan. Refinancing can also combine multiple loans into one, but it’s a different process that is done with a private lender and usually results in a lower interest rate.

With that in mind, here are five times to avoid a direct consolidation loan:

1. Consolidation could increase your interest rate
2. Choosing a long repayment term will make your loan more expensive
3. You cannot consolidate private student loans
4. Consolidation of student loans could adversely affect PSLF payments
5. You could lose benefits

1. Consolidation could increase your interest rate

When you apply for a direct consolidation loan, you are consolidating your federal student loans into one new one. While this may simplify repayment, it may increase your interest rate slightly.

Your new interest rate will be the weighted average of your old rates rounded to the nearest eighth of a percent. To estimate what your new rate would be, use our weighted interest calculator. You can also use our student loan repayment calculator to estimate your long-term interest charges with your new rate.

Consolidation can also increase interest costs by causing capitalization. When your interest accumulates, it is added to your principal balance. You pay back the larger amount, so you basically pay interest on your interest.

Both the slightly higher rate and the capitalization could result in higher interest charges for you.

2. Choosing a long repayment term will make your loan more expensive

When you take out a direct consolidation loan, you have the option of choosing new repayment terms for your loans. Going for a long term of 20 or 25 years can reduce your monthly payments, but it also means that you will pay more interest in the long term.

Let’s say you pay $ 35,000 at a rate of 5.05% over a 10-year term. If you extend your terms to 20 years, you’ll end up paying an additional $ 11,019 in interest. If you choose 25 years, you will pay an additional $ 17,038 in interest.

Although this move might make sense if you have to lower monthly payments, not very useful if you are trying to save on interest. That said, you can still make additional payments to pay off your loan faster without penalty.

3. You cannot consolidate private student loans

In fgeneral, private student loans are not eligible for direct consolidation loans. So, if you are considering consolidating to simplify repayment, remember that your private student loans will not be combined with your federal loans.

Note that you can combine private and federal student loans when you refinance with a private lender. If you can meet credit and income requirements – or apply with a co-signer who can – you may also be eligible for a lower interest rate.

But refinancing federal loans makes them private, making them ineligible for future direct consolidation loans or other federal plans. As such, you need to make sure you understand what you would be sacrificing before you refinance Federal Student Loans.

4. Consolidation of student loans could adversely affect PSLF payments

According to the Department of Education, you will lose credit for payments already made through Public Service Loan Waiver (PSLF) or income-based repayment plans, such as income-based repayment, if you consolidate your student loans.

PSLF waives federal student loans after 10 years of public service. But if you consolidate your loans, you are resetting your repayment term clock, even if you’ve already been on an income-based repayment plan for a few years.

If you’ve already been engaged for a year or more in your quest for the PSLF, be careful not to lose your progress by consolidating your student debt.

5. You could lose benefits

The consolidation of student loans could also result in the loss of certain benefits. As mentioned, you could lose your progress towards loan cancellation when you consolidate. Additionally, you may need to say goodbye to the interest rate cuts you are currently receiving.

You could also lose your grace period for student loans, which typically allows you to delay your loan repayment for up to six months after graduation. To avoid this, you can ask your loan manager not to process your consolidation request until the end of your grace period.

Finally, Perkins loan recipients could become ineligible for Perkins loan cancellation if they consolidate.

Before you apply for student debt consolidation, be sure to ask your agent if you will lose any benefits. If you want, consolidating student loans might not be a good idea.

When student loan consolidation is a good idea

While we have focused on the potential drawbacks of consolidating student loans, there are some advantages to this approach as well.

If the idea of ​​having just one payment per month sounds appealing to you, then student loan consolidation may be right for you. It can be overwhelming and confusing to have many payments to a group of loan providers, which can make it easier to focus on a single loan payment.

Consolidating your student loans will not affect your credit score much. Federal consolidation does not result in a credit check, so it will not hurt your credit score.

If you qualify, Federal Loan Consolidation also gives you the freedom to subscribe to an income-based repayment plan or extended plan, which could make your monthly payments more affordable.

Consolidation also allows you to move to a new federal loan manager, which can be a welcome change if your current loan manager has not been helpful or is difficult to work with.

Finally, applying for a student loan consolidation is a way to get them out of default and get them back in order. The other is to apply for a student loan rehabilitation.

If these advantages outweigh the potential disadvantages, a student loan consolidation might be a good idea.

Understand the difference between consolidation and refinancing

Although we have focused on federal student loan consolidation, this is not the only way to combine multiple loans into one. You can also combine your loans, whether federal or private, through student loan refinancing.

One of the benefits of refinancing is potentially lowering your interest rate. If you or your co-signer has good credit, you may be eligible for a lower rate than you currently have.

In addition, you can choose new repayment terms, usually between five and 20 years. Changing your terms will adjust your monthly payment, allowing you to pay a bill that fits your budget.

But as mentioned, refinancing federal student loans makes them private, so you will lose access to federal protections, such as income-based repayment plans and the PSLF. Make sure you don’t need federal benefits before you refinance federal loans.

If you’re unsure whether it’s better to consolidate student loans, refinance, or put your loans aside, our consolidation or refinancing calculator can help.

Rebecca Safier contributed to this article.

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