Student loan consolidation was first introduced in the mid 1980’s. Originally, it was designed to provide a low interest solution to students struggling to pay their educational debts. Loan rates were usually better for borrowers who sought after student loan consolidation, saving them money and enabling them to make timely loan payments.
Consolidation has changed drastically since its beginning. Once an effective way of managing debt, loan consolidation can often result in the borrower incurring more debt, depending on their personal and financial situation. In today’s world, it is important for borrowers to carefully consider whether or not student loan consolidation is right for their individual situation.
There are a number of variables that can impact whether or not consolidation is right for you. Although there are notable advantages for many students, others will find that consolidation an ineffective means to handling their educational loans. Only you can decide for sure. However, the following information has been designed to help you determine whether or not student loan consolidation can benefit you.
How much debt do you have?
Most lenders have a minimum debt allowance for consolidation. If you do not meet or exceed this amount, you are not eligible for consolidation. Additionally, you must have at least two separate loans with two different lenders. These loans can be private, federal, or a combination of the two.
What benefits does your current lender offer?
Many government lenders offer benefits to borrowers. These benefits can include grace periods until six months after graduation, flexible payment options, and deferred payments. These benefits will no longer be available to you if you consolidate your loans. Although your new lender may have benefits that they can offer to you like lower interest rates for timely payments, federal loans often have more desirable benefits.
Is now the right time?
Mark Kantrowitz, the publisher of FinAid.org states that right now is not the time to consolidate for student with PLUS or Variable Rate Stafford Loans. This is due to the decreasing interest rate available to borrowers with these types of loans. Although it might make sense to consolidate in order to lock in these lower interest rates, the updating for consolidation does not happen until July 1 of the following year. If you wish to lock in a lower interest rate, it is in your best interest to wait until after the update occurs.
Another important thing to consider is whether or not you may want to consolidate again in the future. Unless you return to school and obtain more loans, you can only consolidate once. If rates are lower in the future, you will be locked in to the rate at which you originally consolidated with.
Do you have a Stafford or PLUS loan?
Stafford and PLUS loans used to be variable rate loans. However, since July 1, 2006, their interest rates have been fixed. This means that there is no need for you to lock in a fixed rate. In fact, you may end up paying a higher interest rate by consolidating since your interest rate is weighted on the interest rate of all of your loans combined.
How far are you into the current loan?
If you only have a few years or a few thousand dollars to pay on your current loan, you are likely to find that consolidation is more trouble than it is worth. The term of the loan is likely to increase the amount of money you pay back. The minimum loan term extends for ten years. If you are close to paying off your student loans but are having difficulty making your payment because of a temporary financial or personal issue, you may consider other options to managing your student loans.
Are you considering consolidation because of marriage?
Although there are currently no restrictions on married couples consolidating their student loans, if divorced or separated, they cannot be separated. Another important factor to consider before combining your student loans with your spouse’s is whether or not one of you plans to return to school . If so, combining your loans may not be your best option. By consolidating you and your spouse’s loans together, you would both have to return to school at the same time if you wish to receive loan deferment.
How will it impact your financial situation?
Consolidating your student loans should be about more than just saving money. It should be a means of adequately managing your debt. Does consolidation allow you to start your own business, increasing your income so that you can make higher payments in the future? Will it motivate you to spend less? If these are possibilities, then consolidation may be beneficial.
When considering student loan consolidation, carefully consider all factors and variables. Research your options carefully. The best way to determine whether or not consolidation is right for you is to consider how it will impact your overall financial situation now and in the future.