When Is the Best Time to Consolidate?

One of the most common questions borrowers ask is when they should start the student loan consolidation process. There is no one-size-fits-all solution when it comes to the student loan consolidation process. Some experts say you should consolidate during your grace period. Others say to wait until your repayment period begins. However, the best time to consolidate will entirely depend on your financial predicament and the amount of interest you are willing to pay.

When You Can Consolidate?

Most lenders will not even consider consolidating your loans until you have graduated from school. This holds true for both federal and private loans. When you consolidate, you decide which loans you want to group together, so it makes sense to wait until all of the loan money has been disbursed. You will then have a better understanding of which loans to consolidate and which ones to exclude. Remember, most lenders give you just one chance to consolidate your loans. You cannot go back and exclude certain loans once the process is complete.

Let’s assume that you have withdrawn from school. You took out a series of loans to pay for your educational journey. Even though you did not graduate, you still must pay the lender back. Once you drop out, you will be able to start consolidating your loans immediately.

The only exception to these rules occurs if you are attending school less than part time. It can take quite a few years to finish school this way. This means that accrued interest will stack up at a fast pace. Federal student loans can be consolidated if you are attending school this way. Some private lenders will also allow you to consolidate these loans.

Loan Status

Your student loans will be assigned a status, based on your payment activity. You will be allowed to consolidate during each of these status periods. Here’s a look at the pros and cons you should consider:

  • Grace Period – Most student loans have a grace period that begins after graduation. During this time, you are not required to make any payments. Interest may or may not accrue based on the type of loan. Many think that this is the best time to consolidate. Lenders may give you discounted interest rates when you consolidate during this period. However, you will most likely lose all of your original grace period benefits when you consolidate.
  • Repayment Status – Once you begin making payments, your loan officially enters repayment status. You can consolidate at any time during this period. Most students will consolidate early in this status period. If you wait until your loan is nearly paid off, you do run the risk of paying even more in interest.
  • Deferment Status – Certain individuals will be able to defer payment on their student loans. Active military members are able to defer payment. People facing severe financial hardship can also defer payment. You can consolidate during this period, but pay close attention to your loan’s fine print. Some of your deferment benefits may disappear if you decide to consolidate.
  • Default – If you default on your private loans, consolidating will be much more difficult. Defaulting on federal loans is not as big of an issue. You can still consolidate federal loans. However, you will need to prove that you have made satisfactory arrangements to once again start paying your loans.

Factors to Consider

If you are thinking of consolidating your private loans, pay close attention to the direction that interest rates are heading. These loans carry variable interest rates, which fluctuate with the economy. When the economy is sluggish, interest rates will begin dropping. You may be able to find a better rate. However, private lenders are known to suspend consolidating activities if interest rates get too low. This happened frequently during the most recent economic crisis.