The Pros and Cons of Student Loan Consolidation
The idea behind student loan consolidation is relatively simple. A student who has multiple loans each with their own terms and payment schedules applies for a consolidation package and obtains just one loan that includes all of the money from all of these disparate sources. But, even though understanding consolidation is easy, it can be difficult for students to determine whether or not the concept is right for them. Studying the pros and cons of student loan consolidation can help.
The tidy nature of a consolidated student loan can be appealing. Rather than worrying about all the due dates and all the paperwork associated with multiple loans, students can simply focus their efforts on one simple loan that has only one due date and one set of terms. It just seems easier to manage.
In addition, students who have federal student loans may experience some intense benefits through participating in federal student loan consolidation. For example, the U.S. Department of Education suggests that these loans can lower monthly payments, as they stretch the length of the loan up to 30 years. Additionally, federal loans with variable rates of interest can become much more secure after consolidation, as federal consolidated loans have a fixed interest rate. Students who fret about the cost of their loans due to the interest rate variability may find this appealing.
Consolidating private loans may also be beneficial, particularly for students who had poor credit when they applied for their loans. If they’ve improved their station in the years that have followed, they’ve likely become more attractive to banks, which means borrowing might come with a lower interest rate. Students like this may be able to replace their high-end, expensive loans with cheaper, consolidated options.
Many of the pros and cons of student loans are buried within the fine print of those loans, and students who aren’t careful to weigh their options might end up making mistakes that could cost them. For example, students who consolidate their federal loans may leave some benefits behind, including:
- Interest rate discounts
- Loan forgiveness options
- Rebates on the principal
- Fee waivers
Students who consolidate may also be subject to prepayment fees they didn’t expect. Even though the loans still exist in their new form, the bank considers those loans paid off and forgiven, and that could cost a student a significant amount of money. Additionally, the interest rate provided in a consolidated loan isn’t always lower than the rate provided in the original loan. One student profiled by Forbes, for example, would have paid an additional $50 per year if he had consolidated, all due to the added interest.
It’s also worth mentioning that extended payment plans can be expensive for some students. Stretching those payments out over a period of months or years can mean applying a little less to the principal each and every month, and that could mean spending more on the loan as time goes on.
Making a Choice
Parsing the pros and cons of student loan consolidation can be difficult, but those students who want to explore their options fully should look at a few plans carefully, just so they ensure that they’re not missing out on something great. We can help. Visit our Student Loan Consolidation Center to find out more.