Is It Smart to Consolidate Student Loans?

College definitely isn’t cheap, and after graduation, you might find yourself with a high level of debt. The good news is that by consolidating your student loans, you can make the payments more manageable and even lower your expenses.

What is Consolidation?

When you’re in school, you’ll typically receive money from programs each semester. Since it comes from different lenders, you may owe as many as eight to 10 creditors by graduation. If you borrow for graduate school, you’ll owe another four to six lenders on top of that. Each loan has its own payment, due date, and interest rate. It’s often complicated to keep track of each schedule, and it can cause many to default. With consolidation, your debt is combined, and one loan will pay for the others. The result is that you only have one payment each month.

Consolidation vs. Refinancing

There are some important differences between consolidating and refinancing your debt. Refinancing is generally for private loans, and you can only do it through private credit unions, banks, or lenders. If you have both private and federal loans to combine, you will need to work with a private lender. The big difference between the two is that with refinancing, you negotiate a variable or fixed interest rate. This should be lower than the rate for each loan. The creditors will consider your current credit score and if you have a cosigner. When you refinance federal loans, you will no longer get the forgiveness programs and repayment options they offer. If you have financial issues when getting out of debt, you won’t get forbearance or deferment, which can be critical.

Benefits of Loan Consolidation

There are many reasons it is smart to combine your debt. For example, it can protect your credit score. Consistently making your monthly payments positively impact your score. But if you miss just one month, that number can go down. When you only have one bill instead of 10 to 15, you’re more likely to meet the deadline. It’s also important to avoid defaulting on the debt. That causes your credit score to plummet, and it stays on your record for seven years. If you are struggling to pay on time, you can often get a lower monthly payment.

The reason this expense is lower is that the creditor will extend the loan’s terms from 10 years to 15 to 30 years. When you have a longer debt, your monthly expenses can go down by as much as 50 percent. That way, it will be more affordable while you start your career. Another reason that the monthly payments are lower is that you can often get a lower interest rate. Sometimes banks will give you a discount on the interest rate if you set up an automatic debit from your account. For example, you might get a 1 percent reduction if you make on-time payments for a certain length of time. Once you get the savings, it can continue as long as you stay on time.