Consolidation is a common way to make debt more manageable by converting many monthly payments into one. Federal student loans are popular largely due to their flexibility and eligibility for consolidation. Unlike private loans, there are many ways you can consolidate several loans for easier payment. But why consolidate? Is it right for everyone? Here are some of the major pros and cons of consolidating a federal loan.
The Positives of Consolidation
One payment instead of many- If you have multiple eligible loans, consolidating them can simplify the process of paying off debt. Instead of keeping track of several small payments each month, you can just focus on one larger one.
Lower monthly payments- When you consolidate many loans you are only paying interest on one, so there is a good chance that your consolidated monthly payment will be cheaper than the collective cost of many.
Flexible repayment plans- Consolidation means you get a new loan and that allows you to pick new available payment plans. Plus, with federal direct loans you have several payment plan options and can switch at any time. If you want, you can base the amount of your monthly payments on your income.
The Negatives of Consolidation
Can potentially harm your credit- A new loan can cause a short term drop in your credit score. A portion of your credit score is determined by your ratio of available credit and credit already in use. New lines of credit like a loan can throw off that balance. Normally this is just a short term dip but it can hurt you if you are currently looking for a new home or anything else that requires good credit.
No grace periods- Educational loans often have what is called a grace period, which is a portion of time after taking out the loan when you aren't yet required to make payments. Most consolidation loans have little to no grace period.
Higher interest costs over time- Taking out a new consolidated loan extends the time you have to repay your debts. This means you have a longer period to make payments but it will accrue more interest than if you had paid the original loan off. Since each month your loan gains interest, the more months you extend your loan, the more interest you pay.
It only works once- Once you consolidate your loans you cannot consolidate them a second time.
Fixed interest rate- Consolidated loans often have a fixed interest rate and cannot go up or down. This is good if you were paying for unpredictable interest rates before but it's bad if you wanted to negotiate for lower rates.
After weighing some of the pros and cons you can determine if consolidation is right for you. If it is possible to repay your debts without consolidation, then you should do it. If not, consolidation might allow you to make more manageable payments each month.