According to research, nearly 70% of college students take out loans to fund their education. Then, they graduate with an average debt balance of around $30,000.
In some regards, the myriad loan solutions available to incoming students are an invaluable resource. This financial assistance can help students pursue higher education who might have missed out on such an opportunity otherwise.
Still, the repayment obligation can be crushing, especially to a recent graduate just entering the job field.
Are you juggling payments to multiple creditors? If so, you might wonder, should you consolidate student loans? Today, we’re taking a closer look at that question and offering guidance on the best route forward.
What Are Consolidation Loans?
Consolidating a student loan is similar to refinancing it. Depending on your situation, you may choose to consolidate all of your loans, a portion of them, or even just one.
When you do so, you’ll roll these debts into one, lump-sum bill, which you will then pay off with a new loan. In addition to student loans, you can also choose to consolidate other types of unsecured debts, including:
- Credit card balances
- Medical bills
- Personal loans
There are a few different ways that you can consolidate your loans. For instance, if you’re consolidating multiple credit card balances, you can roll them into a zero-interest or low-interest credit card.
Direct Consolidation Loan vs. Refinancing
In the case of student loans, one consolidation solution available is the Direct Consolidation Loan Program, reserved for federal loans.
Under this option, you can roll your federal student loans into one loan with a fixed interest rate. This rate is determined by taking the average interest rates on all of your federal loans, then rounding them up to the nearest 1/8 of 1%.
If you’re paying on state or private loans (without a federal guarantee), you can choose to refinance them to adjust the terms. Or, you can access a variety of private student loan debt consolidation solutions. If you work with a private lender, they can bundle your debt regardless of the different types of loans you’re juggling.
The major difference between consolidating and refinancing your student loans? When you refinance, your interest rate is flexible and hinges on a variety of factors, including your credit score. With a consolidation loan, your interest rate is fixed and remains that way for the life of the loan.
Why Should You Consolidate Student Loans?
In most cases, the terms and interest rate of your consolidated loan are more favorable than the individual ones you’re currently paying. For instance, your monthly payments might be lower than you’re used to and your repayment term is usually longer.
This makes consolidation an attractive option for graduates looking to regain their financial footing. This is especially the case if they’re getting close to defaulting on their student loans.
A few of the other pros of a consolidation loan include:
- One, easy-to-remember monthly invoice
- Ability to pay via automatic debit
- Lower monthly payments
- More options for deferment and forbearance
- Fixed interest rate
- Extended loan terms (e.g. from 10 years to 15 years)
- No minimum to quality
- Helps avoid defaulting on your loans
- Helps protect your credit score
In short, this is a simpler, easier approach to paying back your loans that can help you establish a routine of paying in full and on time, every month.
It can also help you avoid defaulting on your student loans. Remember: Any time you incur a late fee on an invoice or fail to make a payment altogether, you could negatively impact your credit score.
As you make timely payments on your consolidation loan, your credit score can actually improve. In turn, you could be eligible for lower interest rates from your lenders, as you’re considered less of a risk.
Cons of Consolidating Your Student Loans
While there are plenty of benefits to consolidating your student loans, the option isn’t for everyone. Let’s take a look at a few of the drawbacks that should give you pause before you take this approach.
Longer Terms Equal More Interest
One of the most attractive advantages to loan consolidation solutions is that most offer longer repayment terms. This means you’ll have more time to pay down your balance on each loan.
While this can help relieve short-term financial stress, remember that you’ll continue to pay interest during this time. As such, extending your terms usually means paying more in the long run.
Possibly Higher Rates
While your interest rate is normally lower with a consolidation loan, this isn’t always the case. Both your loan amounts and your current interest rates will help determine the rate you’ll pay.
When you consolidate with a private lender, your interest rate may be variable (not fixed-rate). As such, it can change over time. Make sure you understand the terms of your loan before agreeing to them.
Loss of Certain Benefits
If you combine your student loans, you might lose certain borrower benefits that you had with individual creditors. These could range from loan forgiveness and deferments to flexible, income-based payment options.
Learn More About Debt Consolidation
Should you consolidate student loans? Deciding whether or not to refinance or reconfigure your loan terms can be tricky. You want to make the right decision, but the jargon can be confusing and the numbers can be complicated.
That’s where we come in.
At Debthunch, we connect you in seconds to the debt consolidation lenders who are best-suited to your situation. This way, you can start saving money as soon as possible. Check out your offers today to get started!