What are the pros and cons of student loan consolidation?

What are the pros and cons of student loan consolidation?

by Matthew Kelly

Should you consolidate your federal student loans? It is important to make an informed decision when considering this financial matter. Here are some things to consider when weighing your decision.

1. Your Grace Period

When you graduate you are given a 6 month grace period before you have to start making your loan payments. When you consolidate your loans, you must waive any remaining grace period. This sounds like a bad thing but remember this is not a "free period." Your loans will continue to gather interest on the unsubsidized portions whether you are making the payments or not. So while it's true that you are not required to make any payments for that six month period many students choose to in order to keep their balances from growing.

You may also begin the consolidation process and opt to retain your grace period. Your application is processed and ready for funding but is not actually funded until shortly before your grace period ends. This is a good way to keep your grace period without having to worry about forgetting to apply or not applying in time.

2. Lower Monthly Payments

All federal Stafford, PLUS and Graduate PLUS loans are issued with a 10 year term. This results in a high monthly payment. When you consolidate your student loans, you can increase the term of your loan up to 30 years, greatly reducing your monthly payments.

There are good and bad aspects to increasing your loan term, but they are completely under your control. Increasing the loan term means you will pay more in interest in the long term IF you make the minimum payment for the life of the loan. However, since there are no prepayment penalties you can pay your student loan off at any time. The lower payments of a consolidation can be a great help in the first couple of years after graduation until your salary catches up with your education. Once you have reached your full earning potential you can start making larger payments which will reduce the term of your loan and keep your interest costs down.

3. Graduation

At this time federal law does not allow in school consolidations. This shouldn't have much impact on students since you are not required to make loan payments while you are still enrolled in school. It can be helpful to have a consolidation lender in mind and your application process started before graduation though to give you one less thing to worry about in the hectic months after leaving school.

4. Loan Forgiveness

Depending on what area your degree is in, you may be eligible for loan forgiveness. Laws and programs vary by state so you will have to check your state's particular rules, but in general students who work in areas that serve the public, especially in low income areas, are generally eligible for loan forgiveness. Consolidation does not affect your ability to qualify for loan forgiveness with Stafford loans. Perkins loans on the other hand can not be forgiven if they are consolidated. Be sure to discuss this with your consolidation representative when considering student loan consolidation.

5. Number of Separate Lenders

You may find yourself with several different creditors upon graduation. Consolidating them all into one loan has a few benefits. First, you only have to make one payment a month, making your loan easier to manage. Second, having fewer lenders will help your credit score.

5. Payment Plans

Generally your loans have a set payment plan that was established when you took them out and it is usually just a flat payment for the life of the loan. Consolidation offers several different repayment options including graduated payments, extended payments and income sensitive payments. Having choices makes it easier to make your scheduled on time payments.

6. Deferral and Forbearance

All federal loans have the benefit of 3 years of deferral and 3 years of forbearance; this does not change when they are consolidated. In fact, if you have used any of your deferral or forbearance it is renewed to 3 years each upon consolidation.

7. Repayment Incentives

There are a lot of lenders out there who offer many different repayment incentives. Be sure that you weigh out all the options before you decide which company you are going to use. Make sure that you are getting the most savings on your consolidation. Buyer beware: lenders offering a cash back incentive generally give you smaller savings in the long run. Make sure that you weigh out all available plans before you decide which company you are going to be using.

8. Interest Rates

Many student loans are still on a variable rate and it has been steadily increasing over the last couple of years. The only way to fix the interest rate on these loans is to consolidate them. Since the interest rates have been climbing over the last few years it is best to consolidate before the rates increase again on July 1. When consolidating the interest rate is determined by a federally regulated weighted average of your loans current interest rates. One thing to be aware of is if one of your loans has a significantly higher rate it could throw off your other loans. Make sure your loan advisor goes over your interest rates with you to determine the best way to consolidate.

A consolidation is easy and free for you. It requires no credit check or even employment. There are few drawbacks to a consolidation and they can all be managed or avoided by working with a reliable, trustworthy loan advisor. Is it right for you? The best way to find out is to speak with a knowledgeable loan advisor who can go over your individual loans with you and help you determine your best course of action.