6 Tips for Consolidating Student Loans

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Consolidating Student Loans

The use of student loans to fund a college education is now very common thanks to the rapidly rising cost of higher education. And these days it’s not uncommon for some students to end up with loans from multiple sources.

After graduating and starting careers, many start thinking about consolidating their student loans and working on paying them down so they can lower their debt-to-income ratio to qualify for home loans.

Consolidating loans does have its benefits. For example, by consolidating your loans and extending the number of years it takes you to repay the debt, you may be able to lower your monthly payment. This is an important consideration for those just entering the job market with entry-level positions.

Having a single payment each month also helps to simplify your life. Keeping up with multiple loan payment dates each month can be challenging, and it increases the chances that you might accidentally forget to make a payment.

While consolidating student loans definitely has its benefits, there are some things that could potentially work against you if you choose to do it. Depending on your circumstances, student loan consolidation doesn’t always make sense for every situation. To help you navigate the student loan consolidation world, we’ve compiled a list of six things you need to watch out for.

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1. Your Interest Rate Could Actually Go Up

One of the most common reasons cited for consolidating is to try to get a lower interest rate and lower monthly payments. But it doesn’t always work that way. In fact, by consolidating your loans, there’s a chance that you may end up paying slightly more than you previously did.

The primary reason why you may not end up lowering your monthly payments by consolidating has to do with the way these loans are structured. When you consolidate, your new monthly payment will be based on a weighted average of all of your student loan debt combined. This means you probably won’t end up with a lower interest rate. And to make matters worse, there is also a chance that your interest rate could be rounded up, which would actually increase the amount of your monthly payment by a small amount.

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2. You Won’t Be Able to Use the Debt Snowball Strategy

A popular method of reducing debt for those who have multiple loans is the debt snowball. Some refer to it as payment targeting. In this strategy, you make extra payments on your smallest loan until you get it paid off. After that, you start making extra payments towards your next smallest loan until you get that one paid off. You continue the process until you pay off all of your debt.

The debt snowball strategy can also be used to eliminate some of your debt while you keep the largest loans and continue to pay them off over time. The idea is to eliminate the smaller loans so you can lower the total amount you pay each month and simplify your life.

If you consolidate your student loans, you would not be able to use the debt snowball strategy to eliminate some of your debt. You would be combining all of your debt into one new loan.

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3. You May Not Qualify for Student Loan Forgiveness

A potential major drawback to consolidating your student loans is that if you do, it may knock you out of a student loan forgiveness program if you’ve already made a few years of on-time payments on your current loans. Some forgiveness programs require that you make at least 10 years of payments on your loans before the rest is forgiven. If you consolidate your loans, the clock starts all over.

Another problem with student loan forgiveness and consolidating your student loan debt is many of these forgiveness programs require you to have certain types of loans, like Direct Loans from the US Department of Education. In addition, some of them also require you to be on special payment plans that consider your monthly salary and how much money you have leftover after your living expenses are factored in.

By consolidating your student loan debt, you will end up with an entirely new loan with new payment terms. And the new loan may not fulfill the stringent requirements of most loan forgiveness programs.

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4. You May End Up Paying More

Another potential drawback to consolidating your student loans is your new loan could end up being longer than your original loans. While longer payment terms could help to lower your monthly payment, it could also result in the total amount you end up paying over the years being significantly more when the extra interest is factored in.

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5. You Can’t Take Advantage of Future Lower Interest Rates

Interest rates periodically rise and fall. If you consolidate your loans and then the interest rate drops sometime down the road, tough luck. You are not allowed to refinance again after consolidating your student loan debt. You are essentially stuck with the interest rate that existed when you consolidated your loans until the debt is repaid.

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6. You Need to Be Aware of Student Loan Consolidation Scams

The world we live in is filled with scammers. And, unfortunately, many of these rip-off artists like to target those who are looking to consolidate their student loans. There are many companies that advertise their services and claim to be able to help you with your student loans – but not all of them have your best interests in mind. Many of them just want to get your money.

One example of a scam you need to be on the lookout for is what’s known as the “advanced fee scam.” Some companies will tell you they can help you obtain a better interest rate on your loans and better repayment terms. But they require you to pay a substantial fee up front for their services, which is often a percentage of the total loan amount or a sizable flat fee.

Another potential scam you may encounter is when a company tries to charge you a substantial fee to consolidate your loans but doesn’t do any actual work. They may refer to their fee as an administrative fee, processing fee, or something else. It should not cost you anything to consolidate your student loans.

Yet another scam to be aware of is when a company claims they have the ability to eliminate your student loans – to make them magically go away. No company has the power to do this. Unless you qualify for one of the student loan forgiveness programs, you must pay all of your student loan debt in full.

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Consider the Pros and Cons Before Consolidating

Consolidating your student loans is not a decision to be taken lightly. There are both pros and cons that you should consider before making a decision.

Contrary to popular belief, it doesn’t always work out in your benefit to consolidate your student loan debt. Sometimes it actually makes more sense to keep your existing loans. Consolidation is a personal decision for each individual. At the end of the day, the choice you make has to make sense for your personal situation and financial position.

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June 3, 2019

Mark Gibson

Mark Gibson is a personal finance consultant and wealth-investor.  Mark brings his top-notch financial analysis to his work at FiGuides as our lead consumer finance editor.

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