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Pros and Cons of Consolidating Student Loans

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Graduating college and earning a degree is certainly something worth celebrating.  Unfortunately, it isn’t always easy to celebrate right away when 70% of college graduates have substantial debt hanging over their heads.  The average college graduate takes on $40,000 of debt and 43% of graduated students in debt are either behind on their payments or simply not making them.  However, this debt usually is not coming from one loan and is rather coming from several loans that can vary in interest rate and payments.

One option available to you is loan consolidation.  Consolidating your student loans is the process of combing all of your student loans into a single, larger loan, potentially with a new lender.  This new loan pays off all the individual loans you had and comes with a new interest rate, payment policy, and terms and conditions.  Before deciding if this is the right strategy to go about tackling your student loans, it is necessary to weigh the pros and cons.  Consolidating student loans is not always the best option for every person but it can certainly provide benefits and help you move towards celebrating your degree quicker.

Pros:

  • Simplicity:  When consolidating multiple loans into one or two loans, you only have to worry about keeping track of and making one or two payments.  When you have multiple payments to multiple lenders, it can be easy to miss or forget to make a payment.  Consolidating helps simplify and keeps you organized to avoid late payments which can take a severe hit to your credit score.
  • Saving on Interest:  Through student loan consolidation, you might find that you receive a lower interest rate.  The better credit score you have and proof that you are making wise financial decisions, you will often find yourself receiving a better rate.  If you initially took your loans out when you had a lower credit score and you have since improved your score, you also have a good chance of being eligible for a lower interest rate.
  • Qualify for Discounts:  Consolidating your loans through a bank or credit union gives you the option to make automatic payments which can reward you.  Often time when you set up automatic payments or have a checking/savings account, your financial institution will offer a discount.

Cons:

  • Loss of Benefits:  Depending on the terms and conditions of your loans, you could lose certain borrower benefits when you consolidate your loans.  These benefits could include loan forgiveness, flexible or income-based payment options, or deferments.
  • Potentially Higher Rates:  Based on your current interest rate and loan amounts, you could end up paying higher interest rates which will increase the overall amount that you owe.  It is best to discuss the situation with your loan servicer to see if consolidating your loans will benefit you.
  • Extending Your Loan Term:  If you choose to extend you loan term to get lower monthly payments, you might end up paying more money in the long run through interest over the life of the loan.

When looking to consolidate your student loans, make sure to do your homework.  While it can be a great option to simplify and lower your monthly payments, there are other important factors to take into consideration.  In the end, stay positive.  If consolidating isn’t right for you, there are other ways to manage your debt to get you to the celebration stage.  Your college degree might not always feel like it is worth the investment.  However, bachelor’s degree holders can expect to make 84% more than high school graduates.

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