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When you’re approaching graduation and the prospect of repaying those loan balances – while also taking full responsibility for your post-college living expenses – any way to make loan payments easier sounds really appealing.
And if you have multiple loans to keep track of, you might be asking yourself “should I consolidate my student loans?” It’s a valid question. A Direct Consolidation Loan can look like the answer to a huge problem, simplifying all your various federal loans and monthly payments into just one.
But there are drawbacks to consolidation as well, and it’s important to understand them all before making a decision. Here’s how to determine whether consolidation will actually help you after graduation.
Pros and cons of student loan consolidation
Make no mistake: debt consolidation can be beneficial for borrowers. The issue is determining whether or not consolidating is a good financial solution for your unique situation.
Benefits of student loan consolidation
Let’s start by understanding why people consolidate their federal student loans. One of the biggest reasons is the fact that consolidation simplifies your debt repayment by turning multiple loans into a single loan. This can make it easier to keep track of your debt and stay on top of payments.
Consolidation can also lower your monthly payment, though that may come with a tradeoff of a longer repayment term. This means you’ll spend more time paying off your loans – and pay more in interest over that time.
Consolidating your federal student loans is also often a step in going on an income-driven repayment plan such as Income-Based Repayment or REPAYE. If your monthly payments are unmanageable and you’d benefit from having them capped at a percentage of your income, or have already defaulted and are now rehabilitating your loans, consolidation is the way to go.
The drawbacks to consolidating after graduation
All this being said, there are significant reasons to avoid consolidating your student loans (at least immediately after graduation).
Loan consolidation and refinancing are often confused. Refinancing student loans with a private lender is generally done in order to consolidate loans into one with an overall lower interest rate. Direct Consolidation, on the other hand, does not help save money on interest because it takes a weighted average of your previous loans and tacks on a small percentage on top.
Plus, as mentioned, consolidation can result in a new, lower monthly payment that frees up some cash today – but if your consolidated loan has a longer term, you’ll lose more money in the long-run because you’ll pay more in interest.
Check out this prepayment calculator to see how paying off your loans faster saves you money.
Finally, consolidating multiple loans into one means you can no longer be strategic about how you pay them off. For instance, you could target your highest interest rates first using the debt avalanche method. Or you might choose to pay off any private loans first since they tend to have less flexible repayment options. Consolidation renders this impossible.
The pros and cons of student loan consolidation are closely interrelated. What can be an advantage in one situation (like potentially reducing your payments) can be a completely moot point in another (when your repayment term is extended).
It’s important to evaluate your own personal situation and run the numbers to see what strategy puts you ahead financially. Fee-only financial planners who specialize in working with Gen X and Gen Y and helping with student loan issues can be great resources in getting this question answered.
So should I consolidate my student loans?
If you’re asking, “should I consolidate my student loans?” the answer for most borrowers is probably not. This is especially true if you’re not having trouble making your payments and you can target your repayment efforts to specific loans.
Sophia Bera, a financial planner and founder of Gen Y Planning, agreed that it doesn’t usually make sense for borrowers who just graduated to consolidate their loans. “Your interests rates are averaged and then they round up. Therefore, it’s more expensive to pay off your loans this way,” she said.
Bera added that because most people’s loans all have different interest rates and balances, paying off loans in order from highest interest rate to lowest is the best way to save the most money.
Avoiding consolidation allows you to get strategic with your debt repayment. You can evaluate both your financial situation and your own personality to determine what the best method of debt paydown is for you.
The point is that by not consolidating immediately after graduation, you keep your options open. Remember that other strategies include looking into repayment programs for your eligible Federal loans.
In the long run, the best method of repayment is the one that keeps you on track and continuously taking action until you’re debt-free.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.98%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.80% – 6.22%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|