Consolidate Your Student Loan: 5 Drawbacks to Consider
Want to consolidate your student loans? Great idea! You can decrease your payment, stretch out the loan, and lower your interest rate. But there are a few drawbacks as well.
The 5 items below can actually be good in some ways, but most people would consider them negative. Take a look before you consolidate.
5 Drawbacks to Student Loan Consolidation
1. No Variable Rate Drops:
When you consolidate your student loans, you get a fixed interest rate as part of the package. Most would think this is cool; it stabilizes your rate, and keeps you from any hikes in the interest rate.
Along with no hikes, you also get no drops. If your variable rate would have dropped, you miss out. On the plus side, these changes will typically be small, so you won’t miss much.
Avoiding the Drawback: If you consolidate, you can’t avoid the change in interest rate, but it really is fairly small in terms of the dollar amount and the interest rate hikes would probably balance it out anyway. You can also pay a few dollars extra every month to reduce your principal, which will lower what you pay in interest overall.
2. Cancellation or Discharge Benefits and Deferment Benefits:
Some federal loan programs have special discharge benefits. For example, Perkins loans can sometimes be affected. Kind of like getting a scholarship after you graduate with your degree, where the money pays off one of your loans, a loan forgiveness type action.
Or in deferment, when you can delay payments on a loan to the end of the loan. In some cases these benefits won’t survive the consolidation process.
Avoiding the Drawback: This could be very valuable. If you have a loan where this can happen, you may want to think twice about consolidation. You can just leave this loan out of the consolidation process. Contact your lender to ask about it.
In general, relatively few people will find themselves in this position, so if you don’t know, you should definitely check, but you probably aren’t affected. I have consolidated several Stafford loans, for instance, and my deferment policy is intact. I don’t have a cancellation benefit, so that wasn’t an issue for me.
3. Grace Period Loss:
This issue refers only to the timing involved in the consolidation process. If you consolidate too early, you start payments before you have to. After you graduate, you have a 6 month grace period. These 6 months should be used to get a job, set up a place to live and so on.
Instead, most of us use the time to get used to a new pay rate without loan payments, then realize we will have to fit those payments into our budget. I know, it’s hilarious, isn’t it? ßSarcasm.
Avoiding the Drawback: On the Student Aid site the government runs, (you can find the link on this page ) you will find a suggestion to start to consolidate your student loans about 2 months prior to the end of your grace period. Simple enough, right?
And you should consolidate during the grace period because you will get a 0.5% discount on the new loan interest rate.
This one is worth money. You should consolidate during the grace period for that benefit. The best way to avoid losing the benefit is to get the loan set up with a lender that will do the paperwork during your grace period, but start your payments after the grace period ends.
By the way, many lenders will notify you to start the consolidation process for your loans with their company. After my masters degree, I had all my student loans together at one place. The credit union contacted me and the process was as painless and efficient as any loan can be.
4. Longer Payback:
Of course lenders say this as a benefit. Stretching out your payments lowers them and gives you more room in your monthly budget. In the long run, though, you will pay more on the interest because of all those extra payment.
Avoiding the Drawback:This one is easy, since you can pick your payment schedule when you consolidate your student loans. Just pick the same number of payments as you had on your loan, or the closest alternative.
Another solution: Make extra principal payments and your loan balance will decline faster, and you’ll pay less interest.
5. You can’t eliminate a loan or a payment:
Before consolidation, you have separate loans, and if you pay one off, the payment goes away.
Not with consolidation. Instead, you will have one big loan, you end up with a lump sum. You can pay extra, send extra payments and all, but you don’t eliminate the payment or part of it until you have paid the whole loan.
Avoiding the Drawback: To avoid this one, don’t consolidate your student loans, or at least the ones you think you’ll pay off faster. See below for how I feel about that.
Should You Consolidate Your Student Loan?
Ultimately, it’s your decision. I consolidated, and I would do it again. I’ve been very happy with the arrangement, and the balance is coming down, a good thing for a loan. These drawbacks can affect you, but most are small. If you are in a position to get a cancellation or discharge of your loan, and consolidation will hurt that benefit, that’s big.
It's up to you. Good luck ;)
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