Consolidating your student loans makes them more manageable because you get one payment with one fixed interest rate. This is a required step to access some types of repayment plans. Now that you’ve reached a major milestone and graduated, found a job, and have a steady income, it’s time to think about how to pay off that student loan debt. Consolidation can help you get organized, but it’s not the best choice for everyone.
What Is Consolidation?
By the time you finish school, you may have several loans. Each loan may be serviced by a different administrator. When repayment time comes, you can have multiple due dates, different methods of making payments, varying interest rates, and different minimum installment amounts that can make it very confusing and difficult to keep up with paying off your debt. Consolidation lets you combine your federal loans into one federal direct consolidation loan.
All of your old debts are paid off, and you get a new loan for the total amount of your old loans. The interest rate is fixed at a weighted average of your original loans. You keep the benefits of having a federal loan, and you can get access to more repayment options, like income-based repayment (IBR).
Consolidation Versus Refinancing
Sometimes the terms consolidation and refinancing are used interchangeably, but that is incorrect. Consolidation rolls multiple loans into one to simplify the repayment process. It usually doesn’t save you money or lower the interest rate. Federal direct consolidation loans only involve federal loans, not private ones.
Refinancing can also involve bundling multiple loans into one, but you can refinance both federal and private loans. However, refinancing is not available through the federal government, only private lenders. For that reason, you lose the benefits of a federal loan, including access to some repayment plans. Refinancing usually involves a lower interest rate to save you money.
Consolidation is a good way to get control of the repayment process. Here are some situations where it might make sense for you.
You want to spread out the repayment over a longer period. Sometimes the payments under a standard 10-year plan are difficult for a new graduate to manage. Spreading them out over a longer period can make them more manageable. Consolidation gives you access to terms up to 30 years with smaller payments. While this can be helpful, remember that you pay more interest over the life of the loan.