If you owe multiple students loans to pay for education, you may be able to apply for a consolidation loan that will allow you to combine all of these obligations into one and make only one monthly payment. This can make it easier to pay off your balance, but – and there is a real but here -- financial experts warn that you should do your homework before going this route, as this isn’t the best fit for all situations.
How It Works
A student consolidation loan is basically a contract to take out a new, bigger loan from one lender who in turn pays off all of your other loans. This means you only need to make one payment toward the total owed. You can also often stretch out the terms of the new loan, thereby lowering the monthly payment.
While this sounds good on paper, a loan consolidation is not always as beneficial as you might think. This is because you usually don’t significantly lower the interest rate when you consolidate. The original idea behind the consolidation was to allow students with variable rate loans to lock in a comparable fixed rate. However, now most student loans are fixed, so the cost savings is negligible if you stick with the same loan terms. Further, a consolidation often increases the life of the loan (for example, instead of having 10 years left to pay off a loan, you may take the new loan out for a 20 or 30 year period). Since the life becomes longer, you get lower payments since the total owed is divided up over a much longer time, but on the flip side, you also pay interest on the amount for a much longer time, so the total cost of the loan is also much higher when you factor this in. These are important points that should be considered when you look into consolidation.
Government Versus Private Loans
Before you begin researching a loan consolidation, it is important to consider the type of loans you want to merge. There are two categories: government (or federal) education loans and private education loans. Federal loans come with some important benefits. For instance, the interest can be tax deductible and there is typically an option to defer payments on this type of loan if you go back to school or lose your job or experience other financial hardship. Finally, in certain situations a federal loan can be forgiven. Private loans, on the other hand, are treated just like any other bank loan. Therefore, you wouldn’t want to consolidate federal and private loans together, since to do so would cause you to lose the government benefits.
The Requirements
Most graduates who have multiple federal or private student loans are eligible to refinance these into one. You can still be in the grace period before the loan repayment phase begins but you must have completed the educational program before you can apply for a consolidation. You can also actually have a poor credit rating and still qualify for a consolidation loan. This is important, since by consolidating you may actually be able to better manage your finances.
