Why Consolidating Student Loans Could Be The Worst Mistake New Grads Make


When you graduated college with a bunch of student loans, consolidation might seem like the perfect solution. Consolidating all your loans can save you money and make your life easier, right? And who wants more than one payment a month anyway?

Dig below the surface, though, and you’ll find it’s not so cut and dry. There may be good reasons to continue student loan consolidationbut they don’t apply to everyone, especially new graduates

5 Reasons Direct Consolidation Isn’t For Everyone

Before you go out and ask for a consolidation, it is essential to first understand the pros and cons. While you can simplify your debt situation, you can also pay in ways you never expected.

1. Consolidation doesn’t save you money

When you consolidate your loans into a new consolidation loan, you accept a new interest rate for all loans at all levels. This new interest rate will be a weighted average of your previous rates, plus a small percentage extra. Because of this, you won’t actually get a lower interest rate or save money on interest.

It is important to know that consolidation is different from refinancing, even though the process seems similar. You can consolidate federal loans into a direct consolidation loan, or a combination of federal and private loans into a private consolidation loan. But the above still applies in both cases.

When you refinance your student loans, however, you consolidate your debt with a private lender and generally enjoy a lower overall interest rate. Refinancing can sometimes be a better solution than consolidation, although it shares some of the same disadvantages (more on that below).

2. It takes longer to pay off your debt

When you consolidate your loans, you are effectively restarting the clock on repayment.

Borrowers often extend the repayment period to get a lower monthly payment, which can free up money in your monthly budget. But it also means you end up paying off your loans for much longer than you would with the standard 10-year repayment plan. In the meantime, this new (and much longer) loan repayment period means paying more interest over time.

The Bottom Line: Be sure to run the numbers and several scenarios before consolidating. A lower monthly payment might be nice at first, but the allure could quickly wear off if it means paying off your loans for another decade and adding thousands of dollars in interest.

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3. You can’t be strategic about repayment

Having a mix of different interest rates and balances provides a real opportunity to build a repayment strategy.

By following the “debt snowball” method, for example, you can target your smaller balances first and work your way up. This results in quick wins that help keep you motivated. Or you can take the “debt avalanche” approach by targeting the highest interest rates first and saving more money over time.

When you consolidate, on the other hand, you have one interest rate to contend with and few strategies to consider. While this isn’t always a bad thing, it does prevent you from targeting certain loans based on your goals.

4. You could waive federal benefits

Although a direct consolidation loan is often the first step in an income-driven repayment plan, such as Income-Based Reimbursement Where Pay as you earn, consolidating federal student loans with a private lender actually loses your ability to do so. Private consolidation also prevents you from qualifying for most forgiveness programs. (The same goes for refinancing.)

Before locking yourself into a consolidation loan, consider the types of student loans you have, as well as your confidence in your ability to make payments. If you’re having trouble keeping up with your federal student loan payments, it might be best to keep your options open.

5. You could lose your grace period

Your Grace period is the time you have between graduation and the first payment of any federal loan (private loans generally do not offer a grace period). Usually the grace period is six months – a good amount of time to get your finances under control before you have to worry about that bill.

However, consolidating your loans before the end of your grace period often means giving up the rest of that period. Shortening your grace period means less time to prepare for this new expense.

Final Thoughts

Student loan consolidation is a smart option for people in certain situations, but this rule does not apply to everyone. There are many ways to deal with large and unruly loans; consolidation is only one option to consider.

Before embarking on anything permanent, be sure to weigh all of your options and their potential costs. Your end goal should be to wipe your loans off the map and save as much as you can along the way. Of course, the path to achieving this goal is different for everyone.

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