If you are nearing graduation or have been graced by a “repayment free” period of six months, then you must have already heard about student loan consolidation and its cons. In this post we will consider the so-called disadvantages of consolidation. We say “so-called” because most of them are actually necessary compromises that have to be made since no lender will ever simply reduce your loan for no good reason! But don’t let this get you down, because these “disadvantages” set a clearer path to saving and investing money that is possible only through consolidation.
So let us re-consider the “cons” of consolidation in light of the long-term benefits you will achieve by agreeing to professionally consolidate your student loans.
Disadvantage #1: You End Up Paying More
The biggest disadvantage that is cited for consolidation is the fact that your payments are stretched over a longer time. Hence, your overall payable amount increases. Well does it? Yes, the overall amount increases because you will have to pay the interest for the loan term. What is left out is the fact that during consolidation a newer loan agreement, and hence a newer loan term is created and agreed upon. This means that you can do the math and find the “right” loan term from the lenders.
Consolidation eases your “just graduated” period. It allows you to exert more of yourself, save, and invest money for things you feel perfectly align with your aims in life. The increased “overall” interest payment also leaves out the fact that only consolidated loans are tax deductable and can stave off $2500 in interest payments.
Disadvantage #2: It Locks Out Lower Interests
The second disadvantage is that you “may” get locked up in the fixed interest rate while everyone around you might be enjoying lower interest rates. This is because during consolidation the lender takes a weighted average of your previous loans and fixates the interest rate for the entirety of your loan term. Though the reverse can also be said as market fluctuations may cause the interest rates to rise as well, but that’s beside the point.
The question is are you willing to plan ahead and be determined about your future? If so then consolidation offers the straight path to your loan payment goal – the interest rate is fixed, the payments are scheduled, and you know the details beforehand and without surprises. Hence, you can spend more time worrying and investing your efforts into dealing with other uncertainties in life instead of feeling down “if” the interest rates were to fall.
Just on a side note, the recent debate led by congress on how best to fix your student loan problem actually doubled the interest rate to 6.8% and a newer limit of 8.25 for the year 2015 and ahead has already been considered. Hence, not only the market fluctuations and Treasury Bill, but the Congress as well will have your lender sending out “revised” interest rates to your post mail.
In the end, we do not deride others for posting these “cons” for consolidation, we only think they are trying to create a balance between “too good to be true”. Consolidation when approached with sound homework or professional assistance will prove beneficial on all accounts.
Are you eligible for consolidation? To know if you are eligible for consolidation,
see our 2-part guide [Are You Lost In Loans? Get organized. Consolidate!]
Sources
http://www.asa.org/repay/options/consolidate/default.aspx
http://www.investopedia.com/articles/younginvestors/09/consolidate-student-loans.asp
http://money.usnews.com/money/blogs/my-money/2014/01/24/should-you-consolidate-your-student-loan-debt
