Even though student loans are not what they used to be and they are no longer seen as an absolutely safe solution to financial difficulties, depending on your specific financial situation, consolidating your student loans may still bring you certain benefits. For instance, if you are dealing with a number of student loan payments, consolidating your student loans can really make your life a lot easier by simplifying your payments to just a single monthly payment.
By consolidating your student loans, you are basically combining them all into a brand new, single student loan. Which means that instead of having to keep track of multiple student loan payments every month, you will be able to focus only on a single loan payment, which can ultimately reduce part of your financial stress, as well as make it easier for you to make your payments on time.
By consolidating your student loans into a single larger loan, you may also be able to get better loan terms, including a lower interest rate on your new loan. Below, we will look at some of the advantages and disadvantages of consolidating student loans so that you will be better equipped to make the right decision for your financial future.
What you should know about consolidating your student loans
Since every person’s situation is different, the reasons for a student loan consolidation can also be different. Here are some of the things that you should know in case you are considering consolidating your student loans:
- One of the main reasons to choose a student loan consolidation is to keep yourself organized. If you think that having a single monthly payment instead of multiple payments to think about and take care of each month is going to help you to organize and better structure your time and budget, then consolidating your student loans is surely going to be a good move for you.
- You should know that since your current loans already have a fixed interest rate, if you want to use a Federal student loan consolidation for these loans, you will not be able to save any money on interest. By choosing a longer repayment term, you may be able to lower your monthly payment a bit. But this way, you will end up paying more money in the long run.
- If you decide to consolidate your loans through the services of a private loan lender, you may be able to save some money, however, you may also end up giving more money depending on the interest rate that you are going to get on your private student loan. In order to qualify for a private student loan with a lower interest rate, you will need to have a good credit score. You may be able to get a variable rate private student loan with a lower interest rate, but keep in mind that this could change as the interest rate may increase in the future. With a fixed rate private student loan, you will have a slightly higher interest rate from the beginning, but at least you will know that the interest rate will not go higher with time.
- Generally, unless you are able to qualify for a private student loan with great loan terms, you should stay away from private student loans and go with federal student loans instead. Even though with federal student loans, you will not be able to get a lower interest rate, they have some benefits that private loan lenders simply not offer you.
How to consolidate student loans
Consolidating your loans basically lets you combine all your current loans into a new, larger loan. By paying this single monthly payment, you will be taking care of all your loans at the same time. As you already know, there are mainly two ways to consolidate your loans. You may choose between consolidating your student loans through a federal or a private loan lender.
Federal Student Loan Consolidation
You can use federal student loan consolidation for your federal student loans. With federal student loan consolidation, you are able to consolidate pretty much any federal loan by using a direct consolidation loan program. You should, however, keep in mind that you will not be able to include any of your loans from private lenders as well as any of your PLUS loans, that have been borrowed by your parents on your behalf.
In order to consolidate your federal loans, you will most likely not have to go through a credit check, and you will be able to consolidate your federal student loans when you have graduated, left your school, or if you have dropped below the minimum required enrollment. Even though a federal student loan consolidation loan’s interest rate is fixed for the whole period of the loan, that interest rate may differ from one person to another, depending on that person’s specific financial situation. The interest rate that a federal student consolidation loan has is based on the interest rate of the loans that the person is going to consolidate.
Private Student Loan Consolidation
There are many private loan lenders out there who offer student loan consolidation. Some of these private loan lenders may even let you include some of your federal loans in the private consolidation loan they are going to give you. What you get with a private loan lending company depends highly on your credit score. Having a good credit score will allow you to qualify for a private student consolidation loan with better terms, including lower interest rate. The interest rate on a private student consolidation loan may be variable or fixed.
A private student consolidation loan with a fixed interest rate will have a higher interest rate from the get go, but that interest rate will not change with time. Therefore, you will know from the very beginning how much you are going to need to pay in order to repay that loan. With variable interest rate private student consolidation loan, the situation is a bit different. You may be able to get a lower interest rate at the beginning, but over time, that interest rate may rise and you could very well end up paying more money than you would have to pay for a fixed interest rate private student consolidation loan with a higher starting interest rate.