Student loan debts continue to be a big issue in the United States. It’s causing a lot of financial struggle, and many people are in dire need to escape from difficulties that come with the debts. When you graduate with several student loan debts, which usually is the case, student loan consolidation may be the best option for you. Besides, who wants to be making multiple payments every single month?
But the student loan consolidation is not as straightforward as it seems. It’s one of the significant issues facing student borrowers in the U.S. If you’re not careful, consolidating your student loans can cause you to lose out on many things. For example, without careful consideration, you can miss out on forgiveness programs, repayment programs, or, worse, lose the entire history of your previous loan forgiveness.
There are also student loan consolidation scams sucking thousands of student loan borrowers across the entire country. If you’re not cautious, you can end up owing thousands of dollars in addition to your previous student debts, due to scams. Plus, the loan consolidation program may not be even necessary for you to apply. It doesn’t work for everyone. So, the real question is: Is student loan consolidation the right approach for you?
Before you make a decision, let’s find out about the loan consolidation program. We’ll determine if it’s the right choice for you to get rid of your student loans finally. But first, let’s find out what exactly the loan consolidation program is.
Student Loan Consolidation Explained
Most people are not sure what the loan consolidation is. So let’s make it simple for you to understand. For an average institution, you can incur $40,000 student debt. In case you changed your course, transferred to another school, or graduated, you’re possibly part of the 19% who have $50,000 or more in debt. You may also be part of the 5.6% that has $100,000 in debt. That’s rough!
Now, if you have a student loan debt, the probability of you not having one student loan is very high. You may have gone in for a new loan every semester. That means, at the end of your education, you may have several loans to pay off. When that happens, loan consolidation is one of the ways for you to tackle your student loans.
What Is Student Loan Consolidation?
With the numerous loans to clear off, the student loan consolidation can help you combine those several loans into a single student loan. When the loans turn into a single loan, it makes it very easy for you to manage your monthly payments. Sometimes, it comes with low repayment each month.
Is it possible to manage your student loans without consolidating them? The answer is yes, but it can be challenging to manage, though not impossible. Usually, you’ll have to make multiple payouts to every loan lender, which can be hectic and confusing. But you can use an app to make it simple to track all your student loans in one place. If you can take on the task of managing the loans effectively, then there’s no need to consolidate your loan. However, consolidating student loan debts is more convenient, but it comes with its risk.
There are two types of student loan consolidation:
- Federal or Direct Loan Consolidation
- Private Loan Consolidation (also referred to as refinancing)
Each of them has its advantages and disadvantages. So you need to clearly understand so that you can determine either to go with private, federal, or none of them. Deciding to consolidate your student loan is your personal decision, and the right choice usually relies on some of the following details of your student loan:
- The type of student loan you have
- The interest rate
- Your balance
- The benefits available to you
- The current financial condition
Now, let’s find out more about federal and private loan consolidation.
Federal Loan Consolidation
The federal government consolidates federal loan consolidation through selected loan servicing companies. That means, you can join your many federal student loans, at least two or above, into one direct loan consolidation. It’s the only available type of consolidation from the government.
You can combine all your federal loans excluding PLUS loans, that is, a loan that a parent took out purposely for paying a child’s tuition. However, you can consolidate the PLUS loans made for students. Remember that private loans are not part of the federal loan consolidation.
When you combine your federal loans, you get a fixed rate. The weighted average of the overall student loans you consolidated is equal to the interest rate. It’s then collated to the eighth percent, that is, 0.123%. The weighted average means that any loan you have with a high balance will affect the interest rate. And the loan with the small balance, likewise, will have less effect on the interest rate. In other words, the whole influence of your old student loan, every single one, on the new rate, will be proportionate to the balance of the student loan.
Remember that there’s an indefinite suspension of interest rate on all federal student loans due to the coronavirus. It can be beneficial to you because it can decrease the overall amount of student loans you owe.
Private Loan Consolidation Or Refinancing
When you refinance your student loans, you’re basically writing a new student loan to clear off your previous student loan debts. So, with the private loan consolidation, you can join several loan debts, whether private, federal, or a mixture of both, into a new student loan.
To calculate the interest rate, your loan lender will check your credit history if it’s in good standing or not. Your credit history will determine if you get a high interest or low-interest rate. The private loan consolidation comes with variable interest rates because the conditions in the market are always changing.
The main aim of refinancing is to acquire low rates. The low rate will help you save money and clear off your loan debts as fast as possible.
Difference Between Federal Student Loan Consolidation And Private Loan Consolidation
It’s essential to know the difference that sets the two types of loan consolidation apart. It can help you to understand and decide the best choice to make.
First of all, if you decide to consolidate your loans through federal loan consolidation, and do so correctly, you can benefit from many federal government programs, such as IDR plans or loan forgiveness. However, if you roll with the private loan consolidation, you cannot access the federal programs. The reason is that your student loan, whether federal, private, or both, becomes a private student loan. And private loans are inaccessible to any program benefits offered by the government. But the upside is that you get to have low rates, that is, if only you get a good loan servicing company to refinance your student loans. You can save lots of money due to low interests.
Secondly, with federal loan consolidation, you get to do everything yourself. That means, there’s no third-party to assist you in consolidating your loans. All you have to do is visit the official Federal Student Aid website and proceed from there. Another way is to call your loan creditor to help you, but that’s not the same with private loan consolidation. You have to do everything through a third-party.
Third-party companies are not necessarily bad. They will help you consolidate your loans, but they assist you at a fee. If you decide to refinance your loan debts, be careful with student loan consolidation scams. Know how to recognize them so that you don’t end up throwing away thousands of budgeted dollars.
Why Student Loan Consolidation May Put You At Risk
If you’re considering whether to consolidate or refinance your student loans or seek other options, it’s essential to know the potential risks involved. Loan consolidation can help ease your financial situation, but you could end up paying back your debts in ways you didn’t foresee. It’s best to always be on the lookout.
Saving Money May Not Be Possible In Consolidation
As discussed above, joining your many student loans into a single loan debt comes with a new rate. And the new rate affects all your student loan debts. Also, the new rate becomes the weighted average of your old rates. You also get a percentage on your new rate. Due to this, there’s a low chance that a low-interest rate will be achievable. If that becomes the case, then you won’t be able to save much money.
Refinancing, on the other hand, does provide low rates. Sometimes, it may be the best option if your goal is to achieve a low interest. However, it does have its disadvantages (you can find out more below).
Consolidating Your Loan May Take You A Longer Time To Clear Off Your Loan Debt
You’re basically starting over on repaying your loan debt when you consolidate your student loans. Usually, most people extend the time to repay their debts to get low payments each month. You can save money by using this method. But when you do that, you’ll end up paying back your student loan debts for a very long time. You’ll pay for a longer time than you usually would on a standard repayment plan.
Meanwhile, the rate on your new loan will be increasing as the repayment of your loan debt extends. So the bottom line is that, be sure to cover all the background checks and try out all the possible scenarios before you consolidate. Making low payments every month can indeed ease the financial pressure. But the financial struggle may rise again if you have to take more than a decade to pay off your debt, while the interest is adding more money.
It’s a huge risk because you don’t know what will happen the next week, month, or decade. It can bring so many complications and drawbacks in your life.
There’s No Strategy Around Paying Back Your Loan Debts
If you have different rates, including balances, you get the chance to plan on how to pay back your loan debts. For example, you can decide to pay off the small student loans and target the bigger ones later. Another way is to clear off the bigger loans, and take care of the smaller loans then.
But if you consolidate, you don’t get these opportunities. You only have a single interest rate and very few plans to think about. Now, it’s not entirely a bad thing, but you don’t get the chance to clear off the loans which you consider to be a high priority.
You Can Lose Out On All Federal Program Benefits
Federal loan consolidation helps you acquire IDR plans such as PAYE plan or IBR plan. When you consolidate your federal loans with a private loan creditor, you lose the ability to receive these benefits. Also, you’ll lose any benefit that comes from the federal government when you go in for private loan consolidation.
So, before you choose any type of consolidation loan, review the kinds of loan debts you own. After, examine yourself if you can make the payments on time for each month. If you’re not sure if you can keep up with the monthly payments, it may be best if you have available options you can choose from.
You May End Up Losing Your Grace Period
Grace period refers to the time frame between your graduation and the first time you make your payment on your federal student loans. There’s no grace period in private student loans. The grace period is for six months, which should give you the time to prepare to pay back your loan debts.
If you consolidate your student loans before the grace period runs out, the time for you to prepare will decrease, putting you in an uncomfortable zone.
Is Student Loan Consolidation The Right Option For You?
The answer depends solely on you. As explained earlier, whether loan consolidation is the right decision for you or not will depend on several factors. These criteria will help you determine if you need to go with private loan consolidation, federal loan consolidation, or look for other ways to clear off your debt. They are:
- The type of student loan you have
- The Interest rate
- Your balance
- The benefits available to you
- The current financial condition
If you want to be on the best and safe side, consider looking for an expert to assist you in making the right decision. It’s better to pay a few dollars to come out of debt quickly than staying longer in debt for more than a decade. There are, however, some instances, where you can consolidate your loans.
The first instance is when you have previous FFEL loans and are eligible for Public Service Loan Forgiveness (PSLF). If you consolidate the FFEL loans, you can be eligible for PSLF in the future.
Secondly, if you don’t want to handle many student loans with several loan lenders, you can consolidate your loans. But make sure you cover every ground before you proceed and watch out for student loan consolidation scams.
Depending on your financial situation and the risk you’re willing to take, loan consolidation may be the best option for you. However, if you don’t do your research and cover all known grounds, consolidating your loans can be the worst mistake you’ve ever made. Besides, there are numerous ways to clear off massive student loans. Loan consolidation is one option available.
Before you proceed, take a significant amount of time to know your available options and potential risks, including costs. The main goal is clearing your loan debts while saving money to the best of your ability. You may need to talk to a financial expert who will help you make the right decision.
Finally, beware of student loan consolidation scams. Several federal government agencies have warned the public many times about these scam companies. So if you proceed to consolidate your student loan, watch out for people who pose as loan servicing companies. If you need any help, we can assist you in determining if you’re dealing with a scam.
The path to achieving your student loan consolidation is not a straight line. What works for you may not work for other people. That’s why it’s best to talk to a financial expert. You can call us so that we can help you attain financial freedom.