Increasingly, college in the United States has grown to represent more than a network of institutions for higher education — college now represents a business, and a profitable one at that. The class of 2013 graduated with an average of $35,200 in loans, credit card debt, and IOUs to loved ones and family members.
Dealing with multiple loan payments can be harried and hectic for borrowers, and the opportunities that consolidation offers are worth considering. Here are the factors you’ll want to weigh when deciding how to arrange your student loan baggage.
One interest rate, locked in
Consolidating all your loans into one total loan can simplify many aspects of your payments, especially the interest rate you pay. Your lender calculates the weighted average of your current loans’ interest rates, and that figure gets rounded to the nearest 1/8 of a percent. The resulting number is your overall total student loan rate.
If you prefer predictable payments, a consolidated student loan offers one fixed interest rate that doesn’t waver, regardless of whether annual student loan rates fluctuate. Older non-consolidated student loans revolve around a variable interest rate, which can change each year on July 1, for better or for worse.
What does this mean for you? It means that if you lock in a low rate in a market where interest rates are climbing, you’re capitalizing on the tides of change, and get to keep that favorable rate. However, there is a chance you might lock in a higher rate which can sting if rates begin to drop and you’re stuck with the higher rate you got locked into.
You may even get a higher interest rate if you consolidate loans that have low rates with higher rate loans, so do the math and consider whether an increased rate is worth the tradeoff of having only one bill to pay each month.
Help with affordable payments in the short-term
If you’re finding that your monthly payments are simply too much for you to pay, a consolidated income-based repayment plan may be a better plan for you. IBR plans operate based on how high or low a person’s income is, and stretches the life of their plan by 15 to 30 years. The standard repayment plan for individual loans is usually 10 years, which means monthly payments are steeper. However, a longer plan offers smaller monthly payments, due to the length of the plan as well as its unique income-based aspect.
You’ll pay more over time
On the flip side of consolidated loan positives, are some drawbacks. Though your monthly payment amounts will decrease in the short-term, a lengthier consolidated plan may cause you to pay more over time in the long run. If you extend your repayment terms, you could be paying thousands more in interest payments when all is said and done.
Convenience and no hassle
Consolidating your loans into one bundle can make things much easier on yourself. You’ll have just one loan to whittle away, as opposed to many, and will have streamlined your repayment transactions. This will reduce your chance of missing a payment since you’ll have only one bill to watch out for each month, and in general can be helpful in organizing your bills.
Loans you can’t consolidate
Private loans cannot be consolidated. For borrowers with a combination of loans, the terms of federal loans are typically more generous, can be tax deductible, and come with lower interest rates than those offered with private loans. For these reasons, avoid allowing private lenders to take over federal loans.
Simplifying may not reduce your payments
Consolidated loans are a great route to take when it comes to reducing the number of your loans, but you risk losing benefits attached to specific loans. For instance, some lenders lessen the interest rate if individuals repay on time. Also, others loans, such as PLUS loans, offer additional flexible repayment options that are different than the options consolidated loans offer.
With the toll of college mounting at a premium, students are taking out a staggering amount of loans, and departing graduates entering the workforce are having to contend with juggling loan payments and their round-the-clock search for employment while transitioning from graduates to young adults.
Loan consolidation is one option for borrowers looking to simplify their bills, having one fixed interest rate, and getting certain advantages such as having a repayment plan that works for them, one example being based on their income.
Remember, if you aren’t sold on loan consolidation, you can always schedule your account to make automatic payments for all your loan accounts. As a form of organization, auto-pay works well if you have a steady job. Be wary however, if you have a fluctuating income, because you might be charged overdraft fees due to automatic payments continuing to draw cash from your account.
All in all, the decision lies with your judgment, having now been presented the facts to make an educated choice about your loan repayment.