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Sometimes, student loan consolidation can actually help your financial future. It can put all your loans in one place for one easy monthly payment. It also gives you the chance to reduce your monthly payments, which can help you get out of default or avoid it.
But while there are benefits, it’s not always the best option for everyone. Here are a few times when you should skip student loan consolidation.
The difference between consolidating and refinancing
While similar, consolidating and refinancing are not the same. Consolidating is when you take all your loans and group them together into one big loan. With federal loan consolidation, the interest rates on all your loans average out to a new interest rate.
For private loan consolidation, a private lender determines your new rate. The lender looks at your credit history and how you would tackle repayments to create a new interest rate for you. Generally, consolidation is an option for federal and private loans, while refinancing is only an option for private student loans.
Refinancing is when you use a new loan to pay off an older loan or loans. If your credit score has improved since your student loans were first taken out, refinancing could give you a lower interest rate. But refinancing is only done through private lenders (more on that later). If you’re not sure which one is right for you, our consolidation vs. refinance calculator can help.
Benefits of student loan consolidation
If you’re thinking about student loan consolidation, be sure to weigh all your options before making the jump. You might qualify for some great money-saving advantages, but not everyone is a good match for student loan consolidation. Consolidating student loans has a few pros and cons.
If the idea of having one payment every month sounds enticing, student loan consolidation might be for you. It can be overwhelming and confusing to have many payments to a bunch of loan providers, so it can simplify things to migrate to a single loan payment.
Consolidating your student loans won’t affect your credit score much. Federal consolidation doesn’t incur a credit check, and refinancing has a soft credit pull. In both instances, these actions won’t affect your credit score negatively.
If you qualify, consolidating federal loans also gives you the freedom to work on an income-driven repayment plan or Public Service Loan Forgiveness, according to the Department of Education. Depending on what you have, these are great options for consolidating student loans.
5 times when you should skip student loan consolidation
While there are some good reasons you should consider consolidating your student loans, it doesn’t mean it’s always the best option. Craig Anderson, president of college financial literacy site Student Connections, said stay away from student loan consolidation during these times.
1. Consolidating could raise your interest rate
“Borrowers consolidate loans for two reasons: to lower payments or to lower interest,” Anderson said. “Before consolidating your loans, make sure you understand what your new rates and payments might be. If consolidation places you at a higher interest rate, don’t do it.”
If you have a federal loan, you have fixed-rate interest. When you consolidate, you will get one big loan with a new fixed interest rate. Lenders calculate this new rate based on the rates you were already paying, as a weighted average. Our weighted interest calculator can help you figure yours out.
If you’re planning to pay off your debts on a normal payment schedule, this won’t affect your interest costs too much. But if you want to pay ahead to save on interest, you might save more by leaving your student loans as they are and paying down the higher interest loans first.
2. You can’t consolidate with private loans
In general, private student loans aren’t eligible for Direct Consolidation Loans. When you refinance your loans with a private lender, they calculate your new interest rate. Depending on your credit score and history, you might not be eligible for a lower interest rate. But it means you could also get stuck with a higher interest rate.
3. It could hurt PSLF payments
PSLF forgives student loan debt for some public employees and nonprofit workers. It depends on your job, your loans, and how much you earn. IBR sets your monthly payments based on your salary, not how much money you owe in student loans. If you’re already working within either of these plans, you might skip consolidating student loans.
“Check into Income-Based Repayment plans that may be offered on your loan,” Anderson said. “And even if you can get a lower payment, pay more when you can to reduce the overall cost of borrowing.”
4. You might pay more in interest
Consolidating can lower your monthly bill, but it could add more payments in the long run. That means you’ll be paying more in interest, even with a lower interest rate. Consolidating student loans basically resets your payment period — it’s like you’re starting from scratch. Keep that in mind as you decide if it’s the right option for you.
5. You could lose benefits
Some borrowers offer incentives for repaying student loans that consolidating would take away. For example, your student loan servicer might offer an interest rate discount for monthly payments being automatically withdrawn from your bank. This might go away under a consolidated plan.
Student loan grace periods usually start about six months after graduation. When you consolidate, the grace period goes away and you’ll have to start repaying within a couple of months. You could lose loan forgiveness opportunities depending on your job status. According to debt.org, some Perkins Loan recipients can have part or all of their loans forgiven if they meet certain requirements, but they become ineligible for this if they consolidate.
Student loan consolidation isn’t always a good idea
While student loan consolidation can help some people manage their debt better, it’s not always the best option for everyone. Before jumping into consolidation, make sure it will help your finances and not hurt them. If you find out that you won’t get as many benefits to student loan consolidation as you were hoping for, it’s OK to skip it.
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