According to the Institute for College Access & Success, 69% of graduating seniors at private nonprofit and public colleges had student loans in 2013 and owed an average of $28,400a 2% increase from the previous year. And those graduates face a tough job market: The Economic Policy Institute reported that 8.5% of college graduates ages 21 to 24 were unemployed, based on a 12-month average from April 2013 to March 2014. So what do you get when you combine hefty amounts of student debt with a challenging labor situation? Defaulted loans. Among borrowers in their third year of repayment in 2012, 13.7% had defaulted, according to the Department of Education.
[Read: A Guide to Refinance and Consolidate Your Student Loans]
For many students, the realities of borrowing $25,000 or $50,000 for college dont become clear until the repayment periods begin. At that point, budgeting $170 or $250 per month for student loans can feel like treading water: Youre paying off interest, but maybe youre not putting a dent in the principal. If youre graduating this spring or if youve graduated recently, youve probably heard about the advantages of consolidating your student loans. But what is loan consolidation, and what do you need to know to decide whether its right for you?
Understanding loan consolidation
Loan consolidation is a process that involves combining two or more loans and refinancing them into one. Suppose, for example, that you have three private loans: one worth $5,000, a second worth $2,500, and a third worth $4,500. If you wanted to consolidate these loans, youd ask a new lender to give you $12,000. That money would pay off your old loans, and then youd have only one $12,000 loan to pay off. To be eligible for consolidation, you have to be out of school or maintain less than part-time status; be in the grace or repayment period on your loans; and be in good financial standing. (If your loans are already in default, then youre going to have trouble getting a new loan for consolidation, and you must meet certain requirements in order to do so.) You can consolidate federal subsidized and unsubsidized loans such as Direct Loans, Federal Stafford Loans, Direct PLUS loans, Perkins Loans and Supplemental Loans for Students. You can also consolidate private loans from lenders. But you cant consolidate federal and private loans together; they have to remain separate.
The Pros
Consolidating is a good option if you struggle to keep track of payment due dates. Having one payment per month is certainly better than having three or four. Its also smart if youre having difficulty making your monthly payments. Consolidating three or four loans into one will lower your monthly payment perhaps by a substantial amount. Finally, consolidating lets you lock in a fixed interest rate. If you can secure a rate thats significantly lower than your loans current rates, then you could save quite a bit over the long term.
The Cons
Consolidation has its drawbacks though. For instance, your monthly payment may be lower, but thats because youre extending the life of the loan. If you turn a standard 10-year repayment period into a 20-year repayment period by consolidating, then youll see more cash in your pocket each month, but you may pay double the amount of interest over the life of the loan. And if you pay only the monthly minimum, youll have to deal with repaying your loan for much longer 20 years instead of 10. And as for the interest rate, if your current rates are variable, then locking in a lower fixed rate seems like a great idea. But you can consolidate only one time, so if rates drop, you wont be able to take advantage. Finally, consolidation could mean giving up favorable repayment terms such as a grace period, deferment options and income-based repayment plans.
Deciding if consolidation is right for you
To determine whether consolidation makes sense for your situation, first consider how many outstanding loans you have and how many years of repayment remain. If you have two loans worth $5,000 or just a few years of repayment left, then consolidation may not be worth the hassle. And if youre not having trouble meeting your monthly payments, then consolidation is probably not an attractive option.
If you are struggling to keep up with your payments, however, then consolidation could be a help but do your research before committing. First make sure that consolidating will actually save you money. Next, beware of fraudulent lenders. Your new interest rate will be a weighted average of your existing rates, rounded to the nearest one-eighth of a percentage. In other words, its going to be higher than your lowest interest rate and lower than your highest. So if a consolidator offers you a significantly lower rate for all your loans, then something isnt right. Additionally, be suspicious of any fees a lender tries to charge you for consolidation. Even though the terms of your new loan may be different, there shouldnt be a fee to consolidate.
Finally, be sure you know your options and verify any stipulations before you agree to new terms. Take advantage of every discount available to you. Some lenders, for instance, will offer you interest-rate reductions if you enroll in automatic payments. Dont miss those opportunities. By contrast, if a lender offers to consolidate your loans but claims you have to forgo the standard 10-year repayment plan, double-check that detail. You dont want to pay all that interest if you dont have to. Use reputable online resources as you do your research, and make sure youre working with a trusted lender. Banks, credit unions, the federal government and financial organizations offer great consolidation programs.
Estimate your refinancing savings
According to the Institute for College Access & Success, 69% of graduating seniors at private nonprofit and public colleges had student loans in 2013 and
Three Questions to Ask Yourself Before Consolidating your ...
You can only consolidate your student loans once so I have hesitated with whether I should do this. Not that it is bad; it is just not a one size fits all
Loan Consolidation | Federal Student Aid
Should I consolidate my loans? Carefully consider whether loan consolidation is the best option for you. Most federal student loans, including the following,
FAQs on student loan consolidation - Bankrate
student loan consolidation isn't for Should I consolidate? more dollars to go till you pay off your student loans, consolidation is probably more
Student Loan Debt: Is Consolidation The Answer?
Consolidating your student loans With more than one student loan, there are also unscrupulous lenders offering to consolidate student loans. You should be
4 Reasons to Consolidate Your Student Loans - US News
4 Reasons to Consolidate Your Student Loans Consolidation allows you to lock in a fixed interest rate and avoid default. Student Loan Ranger,
Should You Consolidate Your Student Loan Debt? - US News
If you're making separate student loan payments on each of your five or 10 student loans, you may want to consider consolidating your loans. Student loan
NerdWallet
I Missed a Payment on My Student Loans. What Should I Do? Many grads are unaware they can consolidate their student loans and lower NerdWallets
Refinancing Your Student Loans Nerdwallet | Download PDF
Read Refinancing your student loans nerdwallet and download Refinancing Your Student Loans Nerdwallet, more explanation in Should i consolidate my student loans?
Consolidate Student Loans Interest Rate - Webstator
Should I Consolidate My Student Loans? nerdwallet.com. 3. FinAid | Loans | Why Consolidate? September 19, 2015. This page discusses the pros and cons of
