When to Consider Student Loan Consolidation

Student loan consolidation allows you to pay off multiple student debts with one new debt. Usually, the rate is lower and your payment is reduced. Consolidating loans can make debt much less stressful, but there are many negative repercussions of consolidating. The largest problem is consolidating will have a negative effect on your credit. Because of this downside, consolidation should only be considered only when it is appropriate for your situation.

You Have More than One Student Loan

The first and most basic criterion for student loan consolidation is multiple sources of student debt. You should avoid consolidating other debts with your student loan. For example, if you consolidate your car loan and your student loan, then you are placing your car at risk if you default on your student loan. Instead, minimize your risk and liability by aiming to consolidate only student debt.

You may consolidate debt occurred over multiple semesters or between undergraduate and graduate school. Further, you may consolidate installment debts, such as those used for tuition, with revolving debt, like student credit cards you used to pay your living expenses. Parents may also consolidate debts they incurred to pay for more than one student to attend college.

You Cannot Pay Off Current Loan Obligations

There will be fees and costs associated with consolidating. When you consolidate your loan, you are paying off your initial lender before the lender anticipated. Contrary to what you may think, this can actually be a problem for the lender because the lender will not make as much money as anticipated on your loan. To combat this, the lender will charge you prepayment fees. The lender will also mark your credit report to indicate you modified your contract with them.

Because of these negative consequences, you should only consolidate your student loans if you can no longer afford to make the payments under the current plan. If you are simply looking for a lower interest rate or more ease in your financing, you should not look to consolidation. It is true consolidating at a lower rate will save you money over time. In most cases, though, this financial benefit is not enough to overcome the prepayment fees and the drop in credit score you will suffer. 

You are Eligible under a Federal Consolidation Program

The one exception to the rules above is if you qualify for a federal student loan consolidation. Unlike private lenders, the federal government will not penalize you for consolidating your loans. This means you can gain all of the rewards of a consolidation without prepayment fees and without a negative credit problem. You can only gain these benefits if you use a government consolidation program, however. Private loan consolidation is not an option for most federal debt. 

The good news is the government encourages you to consolidate loans if you are eligible. You will easily capture the benefits of a student loan consolidation across multiple debts or multiple children. You can apply for this benefit entirely online. Payment relief, delay or restructuring of payments is also possible. Those borrowers with private debt may additionally capitalize on federal student loan consolidation for their private debts.


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