Is Consolidating Student Loans Right for You?

Are you having trouble managing multiple student loans or paying the amount due? Perhaps student loan consolidation could help.

If you fail to pay your student loans on time, you’ll face serious repercussions. For example, one missed payment makes you delinquent, meaning you could incur late fees, be reported to a national credit bureau and have difficulty accessing future credit. But miss several payments and your lender might place you in default, which has more severe and lasting consequences. Your default status could sit on your credit report for seven years, hindering your ability to restructure your loans, take advantage of delayed payment options, or get another student loan should you choose to continue your education. You may even face wage garnishment or have your tax refunds seized. 

Avoiding delinquency and default is easy if you repay your loans on time. But what if you can’t juggle multiple student loans and due dates? Or, what if you can’t afford your monthly payments because you earn a low salary or suffered a major illness? 

Before your credit goes downhill, you need to take action. Several options, including loan forbearance or deferment, can postpone your repayment schedule for cases like economic hardship, unemployment or military service. But because these options aren’t available to everyone, you might want to consider loan consolidation. Listed below are some frequently asked questions to help you determine whether this restructuring program could help: 

Q: What is loan consolidation? 

A: Consolidation combines your student loans together so that you make only one payment to one lender on one due date. That lender, in turn, makes individual payments to the entities holding your original loans. Consolidation also lowers your monthly payment amount by lengthening your loan term. 

Q: What are the benefits?

A: First, you’ll no longer have to track multiple loan payment amounts or due dates, making the repayment process easier to manage. Second, you might be able to access a lower interest rate if you’ve improved your credit score since your loan origination date. Third, by stretching out your repayment terms, typically from 10 years up to 15 or 20 years, you can reduce your monthly payment to an affordable amount and avoid the negative impacts of delinquency or default on your credit report. Use this online loan calculator to reveal your estimated new rate and monthly payment. 

Q: Can I consolidate private and federal loans?

A: Yes, but because private loans often have variable interest rates (that can change over time), and federal loan rates are fixed (unchanging) and often lower, it’s smart to consolidate these loans separately. Combine them and you may forfeit the benefits of your federal loan program (e.g., lower interest rates). 

Q: What are the downsides?

A: Stretching out your loan term may make your payment amount more affordable today, but you’ll pay more interest over the long run, thereby increasing your overall repayment amount. For example, if your current payment term is for 10 years at $300 per month, your total repayment amount is $36,000. However, if you consolidate your loans and extend your payment term to 20 years at $200 per month, your total repayment will be $48,000 – or $12,000 more than your original loan. 

Q: Knowing these downsides, who would choose consolidation?

A: If you fail to make timely payments, you could be forced to delay major life events like buying a car or home, or starting a family because you’ve ruined your credit. Consolidation can help you avoid these consequences by making your monthly payments more affordable for the near-term. Then, once you’re back on your feet, remit more than the minimum payment due to shorten your loan term, and ultimately decrease how much interest you’ll pay. (Just make sure your loan doesn’t penalize for prepayment.) 

Consolidation may also be beneficial for students who’ve improved their credit scores since they first obtained their student loans, making them eligible for lower interest rates. 

Q: What questions should I ask a potential lender?

A: Thoroughly investigate any reputable lender you’re considering, and make sure you understand the new loan terms. For example, ask whether the new interest rate is fixed or variable, whether the rate is capped over the life of the loan, or if there are caps on the total amount of debt you can consolidate. Next, inquire about origination fees and prepayment penalties. Origination fees may be worked into your overall loan amount, so they can be tricky to identify. As to prepayment, avoid lenders that charge fees when you make extra payments. You’ll want the option to repay your loan as quickly as possible if you can afford it. 

Q: How do I apply?

A: For federal loans, contact the Direct Loan Consolidation Center at 1-800-557-7392 or apply online. 

To consolidate private loans, select a few lenders and compare the interest rates they offer. You can check with your current banking partner about any programs they have or consult your college’s Financial Aid office for a recommendation. 

Note that you may be eligible for an additional interest rate reduction if you apply during your “grace period.” This is typically a six to nine month period that begins after you graduate and ends the day you must start making payments. Check with your lender for details. 

Q: When should I stop paying individual lenders?

A: Applying for a loan consolidation takes about 90 days. Therefore, continue making regular monthly payments until you receive confirmation that your loans have been consolidated. You don’t want to miss a payment and ruin your chance of being approved for a consolidation loan. 

The Bottom Line
If you just want to simplify your repayment process and make your monthly payments more affordable, consolidation may be for you. But make sure you understand the conditions of your new loan, beginning with the fact that lengthening your term will increase your repayment amount over the life of the loan. 

Consolidation plans work most effectively when you choose a reputable and accredited lender, stick to the plan, restrain your spending habits and live within your means. With the right plan and right partner, you can survive student loan debt just like you survived college.

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