Should I Consolidate My Student Loans?

Should I Consolidate My Student Loans?

Here is a situation that might be a touch too familiar for many of you. After scrambling to make it through the four years of undergrad and perhaps the two years of graduate school, you have a job through which you can utilize your skills and knowledge, as well as a place to gain experience and new knowledge. The salary is decent but once you finish off payments on car loans, rent, utilities bills, and groceries, you nervously await your next paycheck. Your lifestyle is already lean enough before you remember there’s just one more monumental payment to meet before you can rest easily: your college loan debt.

It’s a sinking feeling. But you’re far from alone in this situation.

Student Loans By the Numbers

To give you a sense of just how common loan debt is, consider these numbers. In 2011 to 2012, students graduating with a bachelor’s degree experienced a variety of overwhelming debts.

  • 39 percent of students borrowed more than $24,300.
  • 17 percent borrowed more than $40,000.
  • 3 percent owed more than $70,000 in debt.

In looking at these patterns, one can’t help but feel the weight of the impossible. How will you ever get in front of your debts?

It doesn’t do us any favors to observe the recent history of mean growth in student debt. Students who graduated in 2004, for example, owe a little more than half of the students who graduated in 2011 to 2012.

In fact, Make Lemonade’s 2018 report shows that the 44-million-plus current loan borrowers owe a whopping $1.5 trillion in student loans when taken as a whole. This makes student loan debt second only to mortgage debt (both considered “good” debts), but way higher than credit card or auto loan debts (“bad” debts). In a market that is considerably more overeducated and underpaid each year, these numbers hurt.

Students Loans, Race, and Gender

This is further wince-worthy when you look at larger socioeconomic frameworks. Forty-four percent of undergraduate women take out loans, which, compared to the 39 percent of men, offers us a grim portrait of the economy. Just this year, women ended up with $1,500 more in debt than men upon graduation, and the numbers go deeper when presented with the unfortunate fact that college-educated women make 26 percent less than college-educated men in the workforce.

This makes repayment especially complicated. It should come as no surprise, then, that while 38 percent of men are able to pay off most of their outstanding debt in the four years following graduation, that number is at 31 percent for women, with a slower pace for many women of color, who themselves experience even greater payment discrepancies. Fifty-seven percent of college-educated Black female borrowers, for example, reported that they could not meet essential expenses this past year, and only 18 percent of Latina women could pay off their debts in a three-year period.

            With such a steady increase in loan payments each year, it is essential that students obtain more financial literacy. One option to this anxiety-producing conundrum is debt consolidation.

A Closer Look at Debt Consolidation

            First, what exactly is student loan consolidation? For anybody who has borrowed from multiple loan programs, such as a Subsidized as well as an Unsubsidized Stafford loan on top of a Perkins loan, you have the choice to gather all of your monthly loans into one payment. If this sounds like an easy solution to organizing your accounts, consolidating your student loans is no easy decision, especially when you take into account (quite literally) your outstanding student loan amount. So, what’s at stake?

It might be easier to think about this in terms of metaphor. After graduating, students often feel lost at sea spiritually, and those many debts may appear like a scattering of icebergs. The difference is that, for student loan debts, you can’t simply dodge the icebergs by veering left or right (or risk defaulting on your loans, which you can read more about below). Instead, you need to chip away at them monthly to make future navigations more manageable. Let’s say one of your icebergs is a hefty Perkins loan and one of your icebergs is a mildly bothersome Unsubsidized Stafford loan. The energy required to shift from one to the other may be too much. If it was one mass of ice, you could cover the bases in one go, but such a choice will diminish the iceberg at a slower rate.

Leaving the metaphor behind, consolidating your student loans can have great benefits, though under that mask, these benefits could grow problems of their own. While loan consolidation extends repayment and does potentially lower your monthly bill, it also increases costs in interest over the life of the loan. Here, the iceberg has more time to create new freezing points, inspiring something more Sisyphean than Herculean in the grand scheme. You may very likely lose protections and rights if you switch your federal loans to a private consolidation loan, so it is highly discouraged to go this route with private consolidation loans.

In other words, avoid private lenders if you can help it, opting for government loan programs instead. Consider, too, that, with few exceptions, you only have one chance to consolidate with government loan programs.

Still, there are very good reasons to consolidate your loans. In the above statistics, with regards to the opening scenario, it can prove extremely difficult to cover your monthly costs of living on top of loan payment. You might find yourself ignoring loan payments in favor of more immediate expenses, like eating, paying monthly bills and rent, and perhaps even treating yourself.

Better to veer away from the iceberg than hit it head-on and sink, right? But these actions have consequences and you’d be at real risk of defaulting on your student loans, which is often challenging to get out of. Anybody who needs to get out of default has the ability to consolidate loans. In fact, consolidating your student loans after going default often gets you into pre-default repayment options.

3 Ways Consolidating Can Help You

So who benefits from consolidating a loan?

  1. You stand to benefit if you have multiple loan payments each month. When you consolidate, you streamline that to one payment, one due date, one time a month. You save time and probably money—no more late fees, or at least fewer.
  2. If you use an income-driven repayment plan, also known as an IDR plan, consolidating may work for you. IDRs fall into one of the following four formats: 1) Pay As You Earn (PAYE), 2) Revised Pay As You Earn (REPAYE), 3) Income-Based Repayment (IBR), or 4) Income-Contingent Repayment (ICR). Consider an IDR if your debt is expected to be high compared to your anticipated earnings in your field.
  3. Other federal benefits may be available to students who consolidate. Two such benefits are 1) forbearance and 2) deferment. A deferment allows you to postpone making your monthly payments, and interest does not accrue during this payment hiatus.  Forbearance is a way to reduce the overall amount of your monthly payment. Both are temporary benefits, though they may last up to 6 months (if you are unemployed), or up to 12 months (if you are experiencing economic hardship or apply for so-called discretionary deferment or forbearance, which may be granted for personal issues, illnesses, or death of a family member, to name a few scenarios). In-school deferment or forbearance is unlimited as long as you remain in school on at least a part-time basis. Check with your loan provider for details.

When to Consolidate Your Student Loans

Consider an alternative of the iceberg scenario we talked about earlier. Picture that moment where juggling all your expenses seems like it is at its most severe. Under a loan consolidation, you have more flexibility in reducing your monthly payments and avoiding default.

Ignoring the debt won’t make it go away. Being proactive about the depths of your repayment, however, will control the looming stress of debt. You know exactly where the obstacle is and–with persistence and financial smarts–consolidating your student loans may mean smoother sailing in the long run.

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