Loan Consolidation

When you opt for loan consolidation, rather than paying out different amounts to different lending institutions, you can consolidate all your loans into one, use this amount to repay your original loans, and focus on paying off ONE loan instead of many. This option is especially popular among students who have taken out money from multiple sources to finance their education.

Loan consolidations are worthwhile for some borrowers, but not others. To determine if loan consolidation is right for you, ask yourself the following questions:

What are the interest rates on your loans?

One of the most frustrating aspects of having outstanding loans is the interest that accumulates on top of your loan. Investigate the interest rates of loan consolidations. If a loan consolidation will get you a lower interest rate than your existing loans, then a loan consolidation might be a good option for you.

Are your monthly payments manageable?

If you find it difficult to meet your monthly payments, have used up your deferment and forbearance options, and/or want to evade loan default, consolidation can be a great help to you.

How much are you ready to pay over the long run?

As with all loans, extending the years of repayment on consolidated loans ups the total amount you must pay back.

How many payments do you have left on your loans?

Loan consolidations require effort and paperwork, so if you are on the verge of paying off your loans, a loan consolidation may not be worth your while.

What consolidation loan benefits do your current lenders offer?

Speak to the loan holders currently handling your loans to see if they can offer terms and repayment plans that meet your requirements better than a loan consolidation can.

Benefits of Loan consolidations

The main benefits of loan consolidations include:

  • Replacing payments towards multiple loans with a single payment towards the consolidation loan.
  • The ability to selecting repayment plans, such as extended repayment, graduated repayment, and income contingent repayment.
  • The possibility of locking in the interest rate, including the ability to lock in the lower in-school interest rate during the grace period.

The main drawbacks of loan consolidation include:

  • Obtaining a loan consolidation during the grace period means that you must begin making repayments right away, and cannot use up whatever is left of the grace period. This might include interest benefits on subsidized loans.
  • Perkins loan borrowers might lose some of this loan’s favorable loan forgiveness provisions when it becomes part of a loan consolidation.
  • Extending the repayment term may increase the total interest paid over the period of the consolidated loan.
  • As the law stands right now, a borrower can opt for loan consolidation only once. This means that if, in a couple of years, interest rates go down, a borrower who has already undergone loan consolidation cannot reap the benefits of the lower interest rates.
  • The perks offered for electronic funds transfer and on time payments tend to be less for loan consolidation holders.

Alternatives to Loan Consolidations

Even though a loan consolidation simplifies the repayment process, it does involve a major drawback: a slight increase in the interest rate. Students who are experiencing difficulty making monthly payments should consider some of the alternate repayment terms provided for federal loans. Examples include:

  • Income contingent payments can be adjusted for a lower monthly income
  • Graduated repayment allows for lower payments during the first two years after graduation
  • Extended repayment allows for extension of the term of the loan without consolidation

Note that each of these options raises the total amount of interest paid. However, loan consolidations round up the interest rate to the next 1/8th of a point. Thus, the increase is lower in the 3 options above than in loan consolidation.