Student loan consolidation, undeniably, has many benefits. For many students and parents, it can combine multiple student loans and reduce otherwise unmanageable monthly payments. Yet, student loan consolidation is not right for everyone. It is important to be aware of possible disadvantages so that you can make an educated decision on whether or not this option is right for you.
Understanding Student Loan Consolidation
Student loan consolidations are not intended for marginal debts. In order to qualify, the total amount borrowed must meet or exceed a specified amount. This amount can vary from one lender to the next. In most cases, multiple loans are purchased and paid by the consolidation lender. The student or parent then makes payments to the new lender for a term ranging from 10 to 30 years. The term is set by the borrower.
Loan consolidation allows the parent or student to make one monthly payment. The amount of this payment is generally lower than what would have been paid to individual lenders. In many situations, student loan consolidation can enable students or parents to effectively manage debts.
Disadvantages
Understanding possible disadvantages can aid students and parents in making the right decision concerning their educational debts. Factors that can impact the level of disadvantages for consolidation include the total amount owed, personal financial variables, and how much has been paid to the current loan. In some cases, these variables make student loan consolidation an ineffective means of managing debt.
Because the loan is placed on an extended payment plan, the amount paid over time can greatly exceed the amount that would have been paid if the loan had not been consolidated. Interest rates may also be increased, resulting in a substantial increase in the amount that is paid over time. In some cases, thousands of extra dollars can be added to the overall cost.
Before considering consolidation, consider the amount that has been paid on the existing loans. If a large amount of the original loan has already been paid, the potential increase in interest and extended payment plan may cause the overall cost to meet or exceed the amount that has already been paid, resulting in a loss of a large amount of funds. Carefully review the consolidation terms and rates to determine if the process will even be beneficial to your situation.
In most situations, it is recommended that personal and federal loans are not combined. Consolidation in federal student loans can result in a loss of benefits and grace periods. If consolidation occurs within the first six months after graduation, the student or parent must begin repayment immediately. A loss of benefits can also occur with Perkins loans.
Students and parents cannot combine loans for consolidation. However, each individual borrower can consolidate their individual loans. This could be a disadvantage if parents are in hopes of helping their student by consolidating all educational loans. This could also place either the student or the parents below the minimum debt requirements for student loan consolidation.
Avoiding Scams
Scams can be found in nearly every venue that deals with money. This is true for student loan consolidation as well. Known as Advance Fee Loan Scams, parents or students are led to believe that there is a fee for consolidating their loans. Student loan consolidation is free. Stafford and PLUS loans may request a fee before proceeding with the process but this fee is applied directly to the loan, reducing the total amount owed.
Some brokers have also been known to tell parents and students that they can save money by consolidating. This is inaccurate. Although this may not indicate a scam, it is an attempt to convince you to consolidate on false pretenses. You may want to carefully consider whether or not you wish to borrow from a company that uses this practice in an attempt to gain customers. Even if it is not a scam, it is unethical.
Weighing the Options
Before committing to a consolidation loan, it is important to sit down and consider all factors. This includes potential positive and negative aspects of student loan consolidation. If you are a student seeking consolidation services for yourself, you may even consider discussing the terms with your parents. Parents or students may contact the Department of Education to inquire about specific lenders or to review terms. Parents or students can also seek the aid of a financial advisor to determine if student loan consolidation is an effective means of managing their debt.
The Bottom Line
Although there are a number of disadvantages to student loan consolidation, there are still many positives. For many parents and students, it has helped them to effectively manage debt. Each situation is different and by evaluating your situation carefully and considering all of your options can help you to make the best debt management decision.
Like most other areas in life that involve money, scams are present in the student loan consolidation arena. There are also lenders that are legitimate but offer loans under false pretenses. Learning how to spot possible scams and being educated about loan consolidation can protect you and your finances.
As educational costs skyrocket, more and more graduates are left with an overwhelming amount of debt. Student loan consolidation was originally designed to help reduce educational debt. However, over the last several years, the impact of the economy had changed the way student loan consolidation works.