One of the biggest problems facing the current generation is rising student loan debt. There are many ways to tackle this debt, one of which is loan consolidation. But what does that mean, exactly? This primer should help you figure out if consolidation is right for you.
What is loan consolidation?
When you consolidate debt, you’re actually taking out a new loan, for the full value of all of the debt you owe. Your new loan pays off all of the other loans that you have so that you’re left with one big debt, instead of numerous, smaller debts. For federal student loans, the government offers this as a no-fee service called a Direct Consolidation Loan.
What are the advantages?
One big advantage is simplicity – instead of keeping track of various payments to different lenders, you make one payment to one lender. There are also cash flow advantages. A federal loan consolidation gives you up to 30 years to pay off the debt, and if you were stuck with a variable interest rate, you can switch to a fixed rate, which could save you money.
What are the disadvantages?
Many student loan programs have perks built in. Any principal rebates, interest rate discounts, or debt forgiveness that you might have had with your original loans could be lost. If the terms of your original loans were generous, then trading them in for a new loan could be a risky proposition.
What loans are eligible?
Since a Direct Consolidation Loan is a government service, only government student loans are eligible. This still encompasses many kinds of student loans – Direct loans both subsidized and unsubsidized, Stafford Loans, PLUS loans, and more. However, private student loans are not eligible – you can’t take a loan you got from someone else and ask the government to pay it off for you.
What do you do if you have private loans?
Many private banks offer consolidation or refinancing of loans, as well. These banks can consolidate government or private loans, and they can also offer you a lower interest rate. Be careful if you pursue this option, however. Private loans aren’t as generous or flexible as federal loans. Shop around for a competitive interest rate, and be wary of untrustworthy lenders or people charging a fee to refinance. The government’s student loan consolidation program will never ask you to pay a fee. In general, if you’re going to move your loans into the private sector, you’ll want to do research and comparison shopping on your own. Don’t go with whatever lender sent you a direct mailer, dressed up to look like it’s an official government document. If they’re willing to mislead you in their correspondence, odds are they won’t treat you well once you owe them money, either.
Is loan refinancing right for you?
Loan refinancing gives you more time and more leeway to pay off your loans. However, you can find yourself paying more money over time, and you do lose special benefits that you might have under your current loans. One of the nice things about federal student loans, though, is that there is no penalty for early repayment. If you can get a reprieve from making multiple payments, use that time to get your finances in order, and pay off your consolidated loan early, then it might be to your advantage. Either way, look carefully at the terms of your current loan and of the consolidated loan to make sure you’re getting the best option. There are many repayment options, and if you find one that works better than what you have now, it could be worth it.