A nice way of financing education is by taking up student loans, but despite the fact that they are very helpful, there also remains a responsibility on your shoulders that you need to pay them back. Once you have graduated, it is not uncommon to realize that you have too many loan payments to be made than what you had expected or could deal with.
A solution to this issue can be in the form of student loan consolidation, with which you can even make good savings. In simple terms, student loan consolidation means bundling all of your existing loans jointly into a single loan, due to which you will have to pay to just one lender and will need to make a single payment only.
Due to student loan consolidation, you also receive an opportunity to lock in at a lower interest rate. As a result, this could lead to good savings over a period of time. Most of the federal student loans and private student loans are eligible for consolidation. You also need to fit into certain criteria to be considered eligible for student loan consolidation.
Factors to Consider before Taking up Student Loan Consolidation
There are a few considerations to be made before you sign up for student loan consolidation.
- Make a comparison of the interest rate charged on your current loans and the interest rate on a newly proposed consolidated loan.
- Check to ensure as to whether the loans for which you are paying currently have any prepayment penalties and if they do, you will have to pay them as you would be paying off those loans earlier due to loan consolidation.
- Check the possibilities of gaining or losing borrower benefits with a new lender.
- Since a monthly payment amount will be proposed due to loan consolidation, check to ensure that your financial health is capable enough to handle it.
- Calculate the length of time required for repaying the loan and also the total interest amount you will have to pay additionally due to loan consolidation.
Benefits of Student Loan Consolidation
Student loan consolidation has certain benefits which include:
- Possibility of qualifying for a consolidated loan carrying a lower interest rate, provided that you have private student loans and have progressed on your credit score after receiving your loan.
- Your bill payment process is restructured since now you will have to remember just a single repayment due date and a single check to be written for. Else, with multiple loans, each of your monthly repayments will necessitate you to remember all of their repayment due dates.
- With student loan consolidation, the time available for the repayment of your loans is lengthened and this is beneficial when a change in the income or expenses is expected or if you are facing hardships to repay your loans. But remember that if the repayment term is extended or if the life of the loan is extended, the period of time taken to pay interest on your new loan is also longer, and that would mean more costs.
- The amount of monthly payment is also lowered when the term of the loan is lengthened.
- In the case when you have private student loans having variable interest rates, you can instead get a new loan with a fixed rate of interest by loan consolidation.
- You have the option to receive an alternative repayment plan by student loan consolidation, in the event your financial situation has undergone a change.
- You get to enjoy borrower benefits from certain lenders which can be in the form of discounts on the rate of interest of your loans for payments on time or for automatic payments from the bank account.
Drawbacks of Student Loan Consolidation
Student loan consolidation also has a few drawbacks which are based on the kind of loan. They include:
- Total interest payment could be more.
- Total loan repayment amount could be larger.
- Payment can be for a longer period of time due to loan period extension.
- Your benefits as a borrower such as discounts on interest rates, rebates, etc. from your existing lender can be lost.
- You may have to repay your borrower benefits such as fee waivers, rebates, etc.
- If loan consolidation is done during the initial phase of the grace period, you may be losing your grace period.
- You may have to pay prepayment penalties.
Bottom Line
Student loan consolidation may or may not be the right thing for you. Hence, you will have to study the different factors involved and analyze as to whether it is the right fit to you or not. Though student loan consolidation has good benefits, you may still end up paying higher interest rates. Therefore, it is important that you carefully evaluate the benefits and drawbacks applicable to your individual case, before you decide on taking it up.
