Things to Consider Before Consolidating

If you had to rely heavily on student loans to get through college, you could wind up with a dozen or more outstanding loans when you’re finally finished. Each one has a different monthly payment due date, and each has its own terms and conditions. This is one of the major reasons that people wind up consolidating, because it streamlines the process of paying everything back. Instead of juggling a dozen different payments, you’re down to just the one. It makes your life simpler, and it usually saves you money too. That’s great, but there are some things to consider.

It’s Not Always About the Monthly Payment

Most people who see that stack of payment reminders coming in every month get in a panic and think immediately about the bottom line. It’s understandable, but that’s not always the optimal approach. For one thing, you need to be fully aware of the kinds of loans you’ve got, and how they are different. Some loans, for example, can be forgiven outright under certain circumstances. Take a Perkins loan, for instance. If you have one or more of these, they can be utterly wiped clean if you take a job in Law Enforcement, join the Peace Corps, become a science teacher, or get deployed in the military. If you’re planning to do any of those, then you’d be crazy to lump them into your consolidation plan, because once you consolidate, you lose the ability to wipe that part of the slate clean.

Payment Reduction Is Not Guaranteed

This is another big point to consider. Remember that just because you consolidate, it doesn’t automatically mean that your total monthly payment is going to be lower. Sure, it might, but it could just as easily go the other way. If it does, you still may want to consider it from a logistics point of view if nothing else, but don’t go into the game assuming that a refinance will put extra money in your pocket. You need to hear that upfront and understand how much of a savings you’re looking at before you make a final decision.

Related to this is the fact that certain kinds of loans offer income-based repayment options, while others don’t. If you combine these loans in a consolidation package, then you can lose that income based repayment option, and that can wind up hurting you in the longer term.

You Might Pay More in Interest

Even if your monthly payment comes down, you could wind up paying more overall, because the interest you ultimately get charged on the consolidated loan might be higher than the interest rates on some of your loans. Again, most people have a mix of loans from a variety of sources. Federally secured loans usually carry extremely low interest rates that will be hard to beat in a consolidation program. If you lump those in with your higher interest loans, depending on the exact mix, you may wind up paying more in interest, even if it lowers your monthly payment. At that point, it would depend on how badly you needed some monthly financial breathing room as to whether or not it was a good deal.