Should I Consolidate My Student Loans?

Student debt is rising at unprecedented rates. According to the Wall Street Journal, the class of 2014 was the most indebted class ever, and they are just a part of a continual trend in rising debt amongst graduates. In 1994, students took out an average of $10,000 in student loans after adjustment for inflation. In 2014, this number rose to $33,000.

As undesirable as they may be, student loans are a harsh reality to many college graduates. Many students make a conscious choice to take out these public and private loans, but few are fully aware of the consequences until after they receive their degrees.

Once repayment of the loans begins, students have a few options. They can choose their repayment term length, monthly payments, and choose which loans to pay off first. Borrowers can also decide to apply for federal repayment programs such as Pay-As-You-Earn and Income-Based Repayment, which allows borrowers to adjust their repayment plans according to their financial circumstances.

However, many of these federal plans have specific pre-requisites, and those seeking other options choose to refinance or consolidate their student loans with either the government, or with private lenders.

There is a repayment plan that is suited for each individual, but is consolidation the best choice for you?

What is Consolidation?

To decide whether or not to consolidate their loans, borrowers must first have solid knowledge of what this option is and what it entails. The process of loan consolidation refers to the combination of several loans into one large loan. This means that loans with different interest rates, monthly payments, and term lengths are analyzed, then grouped together in one encompassing loan.

There are two ways of taking the consolidation route. The first is to do it through the federal government, by applying for a Direct Consolidation Loan. In this situation, most federal student loans are eligible for consolidation.

However, by consolidating their loans, borrowers can possibly lose the original borrower benefits that they received with their loans. This may include interest rate discounts, loan cancellation benefits, or principle rebates. Since the consolidation process is irreversible, they cannot change their mind once they have decided to give up their original benefits.

Borrowers can also choose to re-consolidate their loans through private lenders. In this situation, they will lose their rights under the federal loan program. This includes processes such as deferment, forbearance, and cancellation.

Why Might I Want to Consolidate?

There are many varying factors attributed to why borrowers decide to consolidate their loans.

For students who borrowed many different loans, trying to stay on top of each loan each month can be a tiring and taxing process. If overseen carelessly, the inconvenience of having to manage each loan individually can lead to incorrect and missed payments. Consolidating a loan simplifies the repayment process so that the borrower has just one loan payment to deal with each month.

When consolidating loans with the Federal government, the borrower receives an interest rate that is the weighted average of all of their individual loans rounded to the nearest eighth of a percent. However, in certain circumstances, doing so may increase the interest rate of the consolidated loan. To see if consolidating can negatively affects your loans, you can use this online calculator here.

On the other end, some borrowers can consolidate their loans and lower the overall interest that they pay off during repayment. This is often where private lenders can come in handy.

Private loan consolidators often take several factors into consideration when approving a borrower for a private loan. This often includes the borrower’s education history, credit report, and current career/salary. Borrowers with strong marks in the factors listed above can wager for very competitive interest rates.

According to Stephen Dash, CEO of Credible, the best financing options are offered to those who hold credit scores above 800. In this Huffington Post article, he states,

“If you have worked hard to establish excellent credit, student loan refinancing may be a great option for you. Borrowers with strong credit can be rewarded with the lowest rates on the market, which can reduce their monthly repayment significantly. Reducing your monthly payment will also help you stay in good financial standing, and help you save for your next life milestone.”

As of 2015, many private lenders are starting their rates as low as 1.92%.

Why Might I Not Want to Consolidate?

There are certain scenarios in which individuals may not want to consolidate their loans. Since private lenders have to determine themselves whether borrowers are financially capable of paying back their consolidated loans, the approval process may be more difficult than it is for federal loans. If a borrower has a weak credit score and low level of income, applying for consolidation and getting rejected may hurt their credit score further.

For borrowers who are trying to pay off their loans as quickly as possible, consolidating may lengthen the overall repayment period, even if the monthly payment is lower.

As mentioned before, the change in interest rate can affect the borrower negatively or positively. Since this is different for each case, it is up to the borrower to figure out the subsequent changes before applying to consolidate their loans.

Do Your Research

Student loan consolidation comes in many different forms and sizes. Yes, there are private and public options, but even within the private sector, borrowers should do their research to see which lender can best suit their financial needs.

While searching for student loan consolidation programs, it is important to figure out which services are legitimate and which ones are not. Since the process is irreversible, accidentally choosing an unreliable lender can lead to detrimental consequences.

There are many resources online that borrowers can look to for guidance. For example, Student Loan Hero offers borrowers a list of different private lenders that they could look to refinance both their public and private school loans. Each lender has certain pre-requisites and benefits that can be helpful to borrowers in different situations. The article can be viewed here.
Student loan consolidation is just one of the many options available for paying back your student loans. Doing your research and calculations before choosing a repayment plan is the smartest option in planning for your financial future.

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