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May 17, 2019 | money-management

Bundling Benefits: The Pros (and Cons!) of Private Student Loan Consolidation


Still carrying a student loan? At least you’re not alone. Student Loan Hero recently reported that 44.7 million borrowers owe a total of $1.56 trillion – that’s trillion with a T - in student loan debt within the United States. Worse, the rate of indebtedness doesn’t seem to be letting up; the most recent graduation class finished with an average of $29,800 in student loan debt.

For students who secured a new loan each semester, that debt could be spread among more than a dozen separate lenders — including the U.S. government — which all impose different terms. It’s no wonder why so many Americans choose to consolidate their student loan debt through private lenders: one loan package, one interest rate, and one monthly payment.

Here’s a quick summary of the advantages and disadvantages of privately consolidating your student loans.

Advantages:

  • While most federal student loans require you to pay your balance within 10 years – with a repayment start date set six months after graduation - a private consolidation may allow you to reduce monthly payments by up to 50 percent and spread them out over 25 years or more. That can be a massive relief if you need a good chunk of your monthly income to take care of living expenses (which is often the case with young grads).
  • Securing a locked-in interest rate can offer peace of mind in an uncertain market, especially if you find a particularly favorable quote. Sometimes a consolidation allows for an additional discount if you agree to automated payments, which can also eliminate worries about the missed payments and late fees that can haunt your credit report for seven years. That’s a significant issue for many people; according to the Education Department, 10.8 percent (531,653) of debtors who began repaying federal loans in October 2014 had already defaulted by September 2017.
  • Your student loan payments may be tax deductible, but that’s true whether you choose to consolidate or not.

Disadvantages:

  • The terms of your consolidation will be hugely dependent on factors such as your credit score, income, work history, and educational background. This means low-interest rates are not necessarily a given. Offers could range between 2 percent and 9 percent based on your circumstances. You should also note you’ll have little opportunity to refinance again if market interest rates drop lower over the life of the loan.
  • Because direct loan consolidation adds one-eighth of 1 percent to the weighted average interest rate, you’ll be paying slightly more than if the rate represents a simple average.
  • Extending the terms of your loan means you’ll pay significantly more interest over the long haul. The increased terms of the loan may also hamper you – financially and psychologically – from making other significant expenditures such as new homes or vehicles as you move forward in life. However, nothing is stopping you from making additional payments on your principal when that makes sense financially.
  • Such refinancing will nullify the federal protections, repayment options, and forgiveness options associated with your original federal loans, including an interest-free deferment option and access to income-driven repayment plans. You’ll also have to start repayment two months after the loan is approved, not the six months typically offered with an original loan agreement.

The ability to privately consolidate your student loans into one simple package can be a valuable tool under the right circumstances, but be sure to read and understand all conditions of your new agreement. Ensure they are favorable to you before you sign on the dotted line.

Need to unravel the complex consolidation process?

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