When you graduate from college, you may find that you have multiple student loans, such as federal, private or a combination of both. It will be your responsibility to know when the grace period on each ends and repayment begins. If you are well-organized and have kept up with your lenders, this should not be an issue, but some students may find it taxing to try and juggle multiple accounts. Student loan consolidation is often popular among recent college graduates because it provides an opportunity for you to bundle your loans into fewer accounts, simplifying the repayment process. Although this may seem like an easy solution to managing your student debt, there are a few things you should consider before deciding if student loan consolidation is right for you.
For example, if you carry both federal and private student loan debt, I would caution against combining that debt into any type of unsecured loan. It may seem like a great way to have everything under one roof, but you will lose the flexibility and protection you are afforded under the federal student loan programs. Here are some other points of interest that may help you decide whether or not to consolidate any of your outstanding student loan debt.
Federal Student Loans
A variety of federal student loans are eligible for consolidation (Direct Consolidation Loan) provided they were borrowed by the same person. If you have loans through the Federal Family Education Loan Program (FFELP), such as Unsubsidized or Subsidized Stafford Loans, or the more recent Direct Subsidized or Unsubsidized Loans, these may be consolidated into one loan. Unfortunately, loans taken out by your parents (PLUS loan) cannot be included with your debt, even though it was for your education. Generally, to qualify for a Direct Consolidation Loan, you must have at least one FFELP or Direct Loan that is in a grace period or repayment status, and you must not be in default on any current loan. If you are behind on payments, you will need to make payment arrangements with your loan servicer or agree to repay your new consolidation loan under either the Income-Contingent or Income-Based Repayment Plan.
Although there are no application fees or penalties for prepaying your federal loan, you may actually end up with a higher interest rate than you currently have on some of your loans. The interest rate is rounded up on a consolidation loan, so if you have a loan at 4.4%, 5.2%, and another at 6.8%, your new loan could carry an interest rate of 5.75%. Be sure to calculate your potential payments, principal and interest before combining any of your federal loans to ensure you do not end up paying more over the life of the loan.
Private Student Loans
Unlike federal consolidation loans that do not require a credit check, private consolidation loans are a bit more difficult to secure. You’ll need to have a good credit rating or a cosigner with a healthy credit score, as well as meeting the minimum amount of income and debt required to receive the loan. It’s important to ask if your new interest rate will be fixed or variable, and ask about other fees that may be assessed such as an origination fee. On the other hand, many lenders offer incentives or discounts, such as a reduction in your interest rate when you enroll in automatic debit of your payment from your bank account or carry multiple accounts with the lender. Be sure to read the terms of your private consolidation loan carefully before signing on the dotted line.
The thought of a smaller monthly payment can be enticing, especially if you have had difficulty finding steady employment since graduation, but keep in mind that most consolidation loans do not offer grace periods. Once you take out the loan, you’ll generally enter repayment within 30 to 60 days. You may also lose other protections, such as deferment or forbearance, depending on the type of loans you have bundled. Unless your interest rate is reduced, or you are saving money over the life of the loan, it may be better to stick with your original loans. In the end, only you can decide which path is right for you.