Know When it Makes Sense to Consolidate Student Loans
Consider the type of loan you have and your repayment history before seeking consolidation.
Gone are the days when it was generally a good idea for most federal student loan borrowers to consolidate their loans. The student loan world has changed significantly, eliminating two of the biggest benefits of consolidation.
First, most federal loans previously featured variable interest rates. These rates changed annually, so consolidation allowed borrowers to lock in historically low numbers. In July 2006, interest rates on new loans became fixed. Because consolidation interest rates take a weighted average of the underlying loan rates, borrowers no longer automatically get a lower rate by consolidating.
Second, in the past, it was common to have your federal loans held by multiple servicers. By consolidating, borrowers could pay one servicer instead of many. Now, most borrowers pay all their loans under one bill from the start, thanks mostly to efforts on behalf of the Department of Education.
With these benefits removed, borrowers may be wondering if consolidation is even worthwhile. For many, the answer is, not really. However, it can still be a useful tool for some. Here are some situations where it can make sense to consolidate student loans.
1. To o btain access to forgiveness or repayment benefits: Student loan regulations and laws are complicated, but sometimes that can work to the borrower’s benefit. This is true when it comes to consolidation, Parent PLUS loans and Public Service Loan Forgiveness.
While Parent PLUS loans are technically eligible for PSLF. it’s hard for borrowers to take advantage of this benefit. A borrower must make 120 payments under either a standard 10-year, income-based, income-contingent or Pay As You Earn payment plan to qualify for PSLF.
The catch is that Parent PLUS loans are not eligible for the three income-related payment plans. and a borrower paying under a standard repayment plan will have nothing left to forgive after 120 payments.
If you consolidate a Parent PLUS loan under the Direct Loan program, however, it becomes eligible for income-contingent repayment and therefore has the potential to be eligible for PSLF. If the borrower wouldn’t otherwise be eligible for PSLF, having access to this option could make payments much more manageable, especially if the borrower still owes money when he or she retires.
On a related note, as only Direct Loans are eligible for PSLF, borrowers with older Federal Family Education Loan Program loans can use consolidation to transfer those loans into the Direct Loan program to gain access to PSLF.
Consolidation can work the other way too, especially when it comes to Perkins loans. Many unique forgiveness opportunities available to Perkins loans are lost when they are consolidated, so make sure you do your research before taking this step.
2. To obtain a lower payment : While income-related payment plans provide much needed relief for many, those lower payment amounts may still be too high to manage. For those borrowers, especially those with lower loan balances, extending the term of the loan through consolidation may actually yield a lower payment than some other repayment options.
This calculator can help weigh all of those options at once. Just remember that the longer you take to pay the loan, the more you will pay in interest.
3. To manage private student loans: The benefits of student loan consolidation have increased when it comes to private student loans. While it is generally not advisable to consolidate federal loans with private loans since you’ll lose the federal benefits, consolidating your individual private loans may make sense.
There’s been a significant increase in lenders offering a private loan consolidation product. increasing the competitiveness of these products. Borrowers can often find a lower interest rate and more favorable terms, especially if they have a good payment history on their existing private loans to date.
At the very least, private loan consolidations can extend the term of your loans, lowering the payment. As we’ve discussed in the past. private loans have very few lower payment options. so consolidating to a longer term with a lower payment can sometimes be the only option available.
If you have good credit and payment history on the loans you want to consolidate, this can also be a way to release the co-signer from responsibility of those underlying loans. The co-signer will not automatically transfer to the new loan product, so if you do still require one to consolidate, you’ll need to find a new one, or ask your existing co-signer to re-up his or her commitment.
4. To get out of default: If you’ve defaulted on your federal student loans, consolidation is the fastest way to get the loan out of default. Consolidation is not as beneficial as loan rehabilitation, as consolidation doesn’t remove the default from your credit history. However, if you’re not eligible for rehabilitation or can’t take the time to complete that process, consolidation can get your loan back in good standing.
A good place to start to determine the pros and cons of consolidation will be your student loan holder, which will have a good understanding of how consolidation will benefit – or not benefit – your particular situation.