If you left college with a hard-earned diploma and a substantial student loan debt, you aren’t alone. Over 44 million Americans carry some sort of student loan debt; the total student loan debt currently outstanding is a staggering $1.3 trillion. The average 2016 college graduate began adult life with over $37,000 in student loans. Nearly 6% of college graduates, particularly those who attended more expensive universities, switched majors, or pursued advanced degrees, owe more than $100,000 in student loan debt when they enter the workforce.
Most students take out more than one student loan throughout their college years. In some cases, students take out new loans at the start of a new semester or a new college year. Other students take additional student loans on top of those they have to cover the unexpected costs of a college education. Managing multiple loans, with their varied interest rates and payment requirements, can be challenging.
Rather than contend with multiple student loans, many college graduates choose to consolidate them. Student loan debt consolidation can make managing debt simpler and more efficient for people just entering the workforce and attempting to establish a budget. However, before deciding whether to pursue student loan debt consolidation, weigh all your options. Here are several things to consider first.
What’s student loan debt consolidation?
Student loan debt consolidation is the process of combining multiple outstanding student loans into a single loan. Most Federal student loans are eligible for debt consolidation. The new, consolidated loan may be with the Federal Government or obtained from one of many private lenders. Borrowers can consolidate their student loans after graduation, if they leave school, or if they lower their college attendance rate to what’s considered a “half-time” enrollment.
A Federal consolidated student loan has a single, fixed interest rate. That rate normally comes from the weighted average of all the outstanding student loans that were in the consolidated loan. Private lenders will have a wider variety of terms available. After consolidating all their student loans with the government or private lenders, a borrower will have a single monthly payment on the new loan.
Student loan debt consolidation offers many advantages for borrowers. However, it’s not for everybody. Let’s take a close look at the pros and cons of debt consolidation right now.
Why you should consolidate your student loans
There are many pros to consolidating student loan debt; here are some of the most relevant ones.
Simplicity
Managing payments on multiple student loans can be challenging, especially when you’re just starting out in the workforce. Consolidating all student loan debt into a single loan will leave you with a single interest rate and a single payment to manage each month, which will make budgeting easier.
Lower your payments
Paying multiple student loans, especially those with shorter terms and higher interest rates, can be difficult for new graduates who are earning entry-level salaries. A consolidated loan’s superior terms (Federal consolidated student loans often carry lower interest and up to a 30-year repayment period) can lower borrowers’ monthly loan payments considerably, a definite plus for anyone struggling to pay bills after graduation.
Certainty
Many students take out variable rate student loans while in college, taking advantage of the lowest rates available. As time passes, the interest rates on those loans often increase, leading to considerably higher monthly payments. Consolidating those variable rate loans can lock borrowers into a single fixed rate loan and give them peace of mind that their monthly payments will stay the same thereafter.
Access to better repayment opportunities
Depending on their employment status following graduation, consolidating all student loan debt can also give borrowers access to loan repayment opportunities they may not necessarily have on many of their existing student loans. For example, consolidating loans may make it easier to establish a repayment plan for all outstanding debt, based on the borrower’s current income. Graduates who enter public service may even become eligible for loan forgiveness on their consolidated debt as well.
Why you shouldn’t consolidate your student loans
There are also disadvantages to consolidating student loans, and here are a few.
Longer time in debt
If borrowers consolidate all their student loans, the new loan will likely have a much longer payment period than the previous loans did. Borrowers who consolidate their student loan debt typically spend several more years paying off their debt than those who don’t consolidate it. A longer debt period will require borrowers to pay significantly higher interest over the life of the new loan. An extended period in debt may also make it more difficult for borrowers to obtain credit for other critical purposes, too, such as purchasing a home.
Loss of benefits/opportunities
As discussed earlier, consolidating student loan debt into a single loan may offer opportunities such as income-driven repayment or even loan forgiveness. Conversely, borrowers who already have these opportunities on current loans could possibly lose them after consolidating all their student debt, depending on the terms agreed upon when establishing the original loans.
Unfavorable terms
Borrowers’ original student loans may have been at pay period and interest rate terms that are superior to what they can obtain through a consolidated student debt loan. A consolidated loan in these cases may lead to higher interest rates charged and increased monthly payments. Additionally, private lenders may offer variable rates for their consolidated student loans. Consolidating all student debt into a variable rate loan may offer borrowers short-term benefits, but it could lead to higher payments later if the interest rate increases.
Obtaining a consolidated loan
Borrowers who’ve weighed the pros and cons, and have decided to consolidate their student loan debt, have several options available.
Borrowers who wish to consolidate their student loan debt with the Federal Government can apply for a debt consolidation loan at Studentloans.gov. In most cases, any consolidated student loans must currently be in the repayment phase, or “grace period,” after being issued. Borrowers can consolidate student loans that are in default. However, consolidating these loans will require additional work on the borrower’s part, such as having any wage garnishments lifted or making some directed minimum amount of payments prior to the debt consolidation.
Alternatively, borrowers can choose a private lender to consolidate and refinance their student loan debt. Doing so is similar to refinancing other types of debt. Most private lending institutions will check the borrower’s credit and assess his or her current income when determining eligibility for the loan and setting terms.
Addressing student loan debt is one of the first financial challenges new college graduates face. For many recent graduates, student loan debt consolidation may provide a way to deal with their debt more efficiently and effectively. It may even pave the way for debt forgiveness altogether. However, debt consolidation isn’t the ideal choice for everyone. In some cases, debt consolidation may offer no substantial benefits; it may even worsen a borrower’s financial situation. Prior to making any decisions about addressing student loan debt, borrowers should weigh their options and ensure they have all the necessary information to make an informed choice.