Should You Consolidate?

The student loan consolidation process will not be the answer to everyone’s financial predicament. In fact, it could increase the amount of money you end up paying. Lenders will promise you huge benefits including lower monthly payments and the possibility of a better interest rate. The fact is that nothing in this world is completely without risk. This includes consolidating your student loans. Additional interest payments along with losing key benefits could end up costing you even more money!

It is important to carefully weigh the pros and cons of consolidating. Just because consolidating is popular does not mean it is the right choice for you. Your goal should be to make your financial situation better, not worse. Here is a list of questions you need to answer honestly to determine if consolidating makes sense for your financial situation:

  • What Are Your Reasons for Consolidating? The main reason people decide to consolidate their student loans is to have lower monthly payments. You need to ask yourself why you need those lower monthly payments. Are you having trouble making your payments because money is tight? Do you need to free up some money to save for a house or car? Or are you looking for a way to free up some cash to take a big vacation to Vegas? Consolidate only if you are looking to achieve smart financial solutions.
  • How Much Do You Have in Student Loans? Some lenders will require minimum balances, particularly for private loans. Each lender has different requirements, but $7,500 is generally the required minimum. They may even have a cap on how much you will be able to consolidate. Graduate students are often able to consolidate up to $300,000 while undergraduate students can usually consolidate up to $150,000. You will need to look at your federal and private loan balances separately. You cannot consolidate these types of loans together.
  • How Many Payments Have You Already Made? The majority of student loans have an average life of around 10 years. How far along are you in paying off these loans? If you have recently graduated, consolidating may make sense. If you have been paying off your loans for the past six years, it may not. You just have four more years to make payments. If you extend those four years out to 10 years, think of the additional interest you may end up paying!
  • Are You Eligible to Consolidate? Most consolidation companies require that you have either graduated or withdrawn from school to begin the process. You will probably have just one chance to consolidate your loans. Companies want to make sure that your money has been disbursed to get a better understanding of your liability. Private lenders will consolidate loans that are in repayment, grace period, or deferment status. If you have defaulted on your private loans, it will be nearly impossible to consolidate. Federally-backed loans can be consolidated even if they are in default. However, you will need to provide documentation showing that you have contacted the lender and agreed to make satisfactory payments. If you attend school less than part time, you may also be eligible for consolidation.
  • Do Your Current Loans Have any Special Provisions? Your individual student loans may have special provisions attached to them. Private loans may discount your rate because you pay electronically or have consistently paid on time. Some federal loans offer loan-forgiveness programs if you are employed in a specific profession. Often, you will lose all of these benefits if you consolidate. Your loan agreement paperwork should specifically state what happens if you decide to consolidate the loan. Calculate the cost of losing these benefits versus the lower monthly payments you could receive. Also, see if there are any reimbursement fees you will be charged if you consolidate the loan.
  • Does It Make Financial Sense to Pay more Interest? In most cases, you will receive lower monthly payments by consolidating. You get those lower payments by increasing the number of years you will be paying off your loan. This means that you could end up paying much more in interest. The good news is that private and federal loans can no longer charge you prepayment penalties, so you can pay the money back early, reducing the overall interest you have to pay the lender without any fear of penalties.