Having trouble handling your student loans responsibly? If you’re like many, consolidation might seem like an extremely attractive option. Here’s how it works and some insights on whether it’s actually the right move for you.
A Primer on Federal Loan Consolidation
According to the U.S. Department of Education’s Federal Student Aid office, consolidation involves the combination of one or more federal student loans to create a unified new loan. The resulting loan is known as a Direct Consolidation Loan, and it has the advantage of allowing you to make a single monthly payment.
Consolidation vs. Refinancing
Loans that result from refinancing are private loans whose interest rates depend on factors like your credit score. Although you can refinance federal loans, private loans are not eligible for consolidation.
Refinanced loans also lack benefits such as the ability to defer a subsidized loan, or temporarily place your payments on hold without accumulating interest during periods such as times of economic hardship. Private refinancing also eliminates your eligibility for loan forgiveness based on your work in public service fields, and the repayment options might not be quite as attractive.
Who Can Consolidate?
Anyone who holds federal student loans and fails to meet the minimum enrollment requirements to be a half-time student can apply for consolidation. Before obtaining a Direct Consolidation Loan, however, you generally need to:
- Have at least one federal loan that’s in repayment or in a grace period,
- Have an existing Direct Consolidation Loan and another federal loan to consolidate, or
- Come to a repayment agreement with your servicer if you possess a loan that’s in default status.
Check the consolidation application to determine which federal loan programs are eligible. Applying doesn’t include any fees, and there are also no penalties for early repayment.
Should I Consolidate? The Pros and Cons
Like the majority of federal student loans, Direct Consolidation Loans feature fixed interest rates that are based on weighted averages of your existing rates. There’s no cap on the new rate, but the fact that it won’t change could ultimately make it easier to manage.
Direct Consolidation Loans can also make you eligible for repayment plans that actually reflect your ability to pay. In addition to capping your monthly payments to a predetermined percentage of your income, these programs can eliminate your remaining balance after a few decades or help you gain loan forgiveness based on your profession. Although you’ll be required to recertify your personal details annually, these plans can dramatically reduce the financial strain that you and your family experience.
One of the biggest advantages of consolidation is that you don’t have to remember to make a bunch of different payments each month. If you’re absent minded, this is a great way to steer clear of penalties.
Of course, consolidation isn’t for everyone. For instance, your consolidated loan’s longer term might mean that you ultimately pay more in interest. You could also lose eligibility for certain forgiveness programs that are offered by individual federal loan programs.
Still unsure whether consolidation is a sound idea for you? Fortunately, it’s easy to get started at StudentLoans.gov, and the process only takes around half an hour. Even if you decide not to fill out the application, reading through its terms is a good way to obtain an accurate idea of how consolidation might work in your specific situation.