What is student loan consolidation?
If you’re like many borrowers, you probably have multiple student loans – some of which could be private loans or federal loans . Did you know that you can combine your student loans into one loan? If this thought is appealing and you have more than one federal student loan, consider consolidating those loans with the federal government. It’s an option that could help simplify your life.
Under the Direct Consolidation Loan program, when you consolidate multiple federal student loans into one, your interest rate won’t change. Instead, you’ll pay a fixed interest rate based on the weighted average of the rates on your previous loans, which is then rounded up to the next one-eighth of 1%.
Let’s look at the pros and cons of consolidating your federal student loans and see if it’s a right choice for you.
Learn the advantages of combining your federal student loans.
There are no credit or income requirements
Anyone with multiple federal student loans automatically qualifies, regardless of how much money you earn or what your credit score looks like. Your ability to repay the loan is not tied to your income, which is good to know when you’re just starting out.
You can choose your monthly repayment option
While you’ll typically have 10 years to repay your loan, there is an option to stretch out your repayment to 30 years depending on the repayment plan and the total amount of the loan you are consolidating. Keep in mind that the longer you take to pay off the loan, the more you’ll pay in interest over time. You may be able to make your payments more affordable with an income-driven repayment plan, which ties your loan payments to your income. Depending on the loans you are consolidating and the repayment plan you select, any remaining debt is forgiven, or cancelled, after 20 or 25 years, as long as you’ve been paying on time. Just know you’ll still have to pay tax on the amount.
You may qualify for loan forgiveness
Certain public service workers may be eligible for loan forgiveness after 10 years of employment, which means that some or all your debt would be cancelled. The Public Service Loan Forgiveness Program forgives the remaining balance on your loans after you’ve made 120 qualifying payments while working full-time for a qualified (government) employer. Review the program’s terms and conditions to understand if you could qualify.
You can hit pause on your payments
If you lose your job, get sick or return to school, you have different options to put your payments on hold. A deferment of your student loans allows you to postpone the payments and are allowed in certain situations such as attending college classes, an approved graduate fellowship program or serving in the U.S. armed forces or National guard. If you’re ill or face financial difficulties, you can request forbearance, which stops the payments or reduces the amount for up to 12 months.
Federal student loan consolidation is free
Simply visit studentloans.gov to get started
There are disadvantages to consider if you consolidate your federa student loans.
Beware of the new interest rate
When calculating the weighted average interest rate on your new consolidated loan, you’ll want to consider whether one of the loans you’re consolidating has a higher rate compared to the others. If so, it might make more sense to pay that high-rate loan off quickly rather than combining it as part of your new consolidation loan.
You could pay more in the long run
Sure, your monthly payments will be lower, but as already mentioned, this increases the amount of interest you pay over the life of the loan if you increase the repayment term. That’s okay if your income is steady and you plan to pay the loan off early and there’s no penalty for doing that.
Your loans must come from the federal government
Federal student loan debt consolidation is not an option for private loans.
Although consolidating your federal student loans can be beneficial changing your federal loans to private loans can be another matter. In that case, you’d lose some important benefits, such as the option to tie payments to your income, which could make them more affordable. You’d also give up any opportunities for loan forgiveness, which means the loan would be cancelled and you’d no longer have to pay some or all of it. Depending on your financial situation, private loans may also require a co-signer.
There’s a lot to consider when it comes to consolidating your student loans, and you ultimately have to make the best decision for yourself.
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