70% of American university students graduate with a significant amount of student loan debt.
And the crisis is so bad that many students are finding that they are unable to pursue the jobs they studied for because they cannot pay off their loans working in that area.
Paying back your student loans may seem like a momentous task, but there are some strategies to help you do so.
You may have asked yourself at any given time, “Should I consolidate my student loans?”
As you can tell from the title, the answer is most probably yes.
Read on for some key reasons why consolidating your student loans is so helpful (and fiscally responsible).
What is Loan Consolidation?
Before we get into why consolidating your loans is usually a good idea, let’s get into what consolidation actually is.
Debt consolidation is where you take all of the debt owed and place it one line of credit. Many people do this with credit card debt, where they take out a new credit card with a lower interest rate, pay the old credit card off and then continue payments.
This helps you both lower your interest rate and pay off all of your loans in one convenient location.
How Is It Different from Refinancing?
You may have heard the terms refinancing and consolidation used in the same sentence, or as similar strategies. They aren’t the same, but both are great for people with significant student debt.
While consolidation is putting all of your loans together, refinancing means selling your debt to a private lender and negotiating new terms. Sometimes, this can reduce your interest rate, and can be done in combination with refinancing.
However, this option is not as common, as it is usually only open to students who make a decent income and already have a fantastic credit score. If you’re drowning in debt, it’s likely you have either of these, and that refinancing won’t be a great option for you.
Consolidation Can Give You a Longer Time to Repay Your Loans
By consolidating your loans, you may buy yourself more time. In some cases, with federal loans, you can receive up to 30 years to repay them. This helps cut down on the stress of repaying upfront, as you can spread the loan repayments out a little bit better.
Your Rates Will No Longer Be Variable
Some federal loans don’t have a fixed interest rate, and can widely fluctuate. Even if they don’t fluctuate too much, a different of 1 to 2% interest can be extreme if you owe a lot of money in student loans.
When you consolidate your loans, your interest will not only be fixed, but all of your loans will have the same rate. Loans that are not consolidated may have some loans with a variable interest rate and some without.
You’ll Get a Single Monthly Bill
Federal loans, and sometimes private loans, are with several different lending institutions, meaning that you may get four bills a month if you have loans with four institutions. Because of this, you’ll have to keep track of what you owe when, in addition to other household bills.
Keeping track of mortgage or rent, telephone and electricity is already a handful. But also keeping track of four or five different student loan repayment deadlines can be a lot as well.
With one student loan bill, you’ll just have one to pay off each month.
You Can Repay Based on Income
Depending on how much you earn, you may be able to repay your student loans based on your income. Once you consolidate, you may be able to repay all of your loans based on income.
Federal loans that have borrowers repay based on income also take several other things into account. For example, they also consider how many children you have, what your spouse does, and other financial commitments you may have.
This way, your student loan repayments will never be so crushing that you’ll have to choose between getting gas and your student loan.
If your financial situation gets completely out of hand, you can defer student loan repayments for as long as necessary. This way, you have some breathing room to get back on your feet.
You May Be Able to Defer While Going Back to School
Getting another degree? Awesome. You won’t need to pay back student loans while you’re working on the degree, as you’re not expected to have a full-time job during this time.
While paying on the principle of the consolidated loan is a good idea, even if you’re in school, it does help free up money for other costs associated with further education.
It’s a Great Idea If You Have a Lot of Student Debt–But Sometimes It’s Not Enough
If you’re literally drowning in student debt, consolidating your loans is a fantastic option. But, as McCarthy Law PLC says, sometimes even consolidating and refinancing can only go so far. There are times when you may need to hire a lawyer to get student loans discharged, though this is done in more desperate situations.
Speak to a lawyer who specializes in this area if you think this may be something you’re interested in to help you get a fresh start.
Is It Ever a Bad Idea to Consolidate Your Loans?
Typically, there are few reasons to not consolidate your loans, but in some cases, a financial advisor may suggest against it. This is only in the circumstance that you’re already paying a lower interest rate with your current loans than you would if you consolidated.
This isn’t especially common, so it’s important you work with a debt advisor or pay special attention to your rates before you take the consolidation plunge.
When Not to Consolidate Your Loans: You Don’t Have a Huge Amount of Student Loans
If your student loan debt is manageable, as in you can foreseeably pay them off in the future, it is better to do this than consolidate.
One approach is the snowball method, which also works for settling other debts. With the method, begin to pay off the highest student loan first and throw yourself into it.
Say, for example, you have a $10,000 debt with one lender, a $3,000 one with another lender and a $2,500 one with a third lender. You know you can pay all of these off, but it’s going to take some time.
Instead of paying the minimum payments on all of the loans, set the default to be the minimum for the smaller loans. Next, use all of your extra money to pay off your $10,000 loan.
Once you’ve got that fire out, then start on your other loans.
Some people also like to work with the smallest loan first, having you pay off the $2,500 loan, before tackling the next highest loan.
Why Consolidation Can Be a Bad Idea If Your Debt is Not Significant
One reason consolidation is not a good idea if your debt is not significant is because, psychologically, it can seem more difficult to pay off. Knowing you have a $2500 loan to pay off seems much easier and manageable than a full $15,500 loan, as mentioned in the above scenario.
It can also be bad if you’re not in significant debt because you can extend the period in which you can pay it off.
While this may seem like a temporary relief, it’s not good in the long run for your wallet. This is because the interest will rise, ensuring that you pay more over time than you would if you paid it off in a shorter time period.
If you’re not in significant debt and can get a handle on it, staying away from consolidation is the best bet for you. Otherwise, consolidation can be key to managing your overwhelming debt.
So, Should I Consolidate My Student Loans?
We can’t answer the question of “Should I consolidate my student loans?” for you. Instead, you’ll have to do your own research, and see if it is right for you.
We’ve listed some of the pros and cons of consolidating your student loans, and in which circumstances it works best. If you’re still unclear, speak to a financial advisor and discuss all of your options with them. They can most likely help you find a workable solution to your student loans.
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