Student Loan Consolidation - Pros and Cons

If you have multiple student loans, you may want to consolidate them at some point.  Consolidating basically means taking out a brand new gigantic loan to pay off all of your smaller loans.  Let's consider some arguments in favor of student loan consolidation and some arguments against student loan consolidation.

Student Loan Consolidation - Pros

  • Consolidating your student loans makes life simpler.  Depending on when you went to school and what types of loans you took out, you may have to juggle multiple payments each month.  Consolidating ensures that you only have to worry about one student loan payment each month.  Keep in mind that private student loans cannot be consolidated with federal loans.
  • Student loan consolidation could help protect your credit report.  Let’s pretend I have taken out eight subsidized loans and eight unsubsidized loans --- one for each semester.  Before I consolidate, I may still only get one bill and make one payment to my lender.  But, as far as your credit report is concerned, each loan is listed as a separate debt.  So, if I miss “one payment,” this may actually show on my credit report as 16 missed payments!
  • If you have Stafford loans that were taken out prior to July 2006, your loans probably have a variable rate.  Consolidating those loans would lock in a fixed interest rate and help protect against future interest rate increases.
  • If you consolidate your student loans, you may have repayment options that would enable you to stretch out your payments over a longer period of time.  This could allow you to make smaller payments.

Sounds like a slam dunk, right?  Not so fast.  Let’s consider the disadvantages also.

Student Loan Consolidation - Cons

  • The new interest rate will be a weighted average of the loans being consolidated, rounded up to the nearest one-eighth of a percentage point.  So, you may end up paying a slightly higher rate.
  • If all of your Stafford loans were taken out after July 2006, you already have fixed rate loans.  Thus, there would be no reason to protect against future interest rate increases.
  • When certain loans are consolidated, you may lose eligibility for some of the forgiveness programs.  For example, federal Perkins loans offer loan cancellation for certain teaching positions.  If an eligible loan is paid off through a consolidation, eligibility may be lost.  You do have the option of leaving some loans out of the consolidation.
  • If you have a Parent PLUS loan, including it in the consolidation will make all the loans ineligible for Income Based Repayment.

For more information, I recommend checking out the Department of Education’s website on student loan consolidation.  The site answers a lot of frequently asked questions, and enables you to go through the entire consolidation process online.  Happy consolidating!

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