The pros and cons of student loan consolidation
There are many good reasons to consolidate your student loans. However, there are an equal amount of considerations borrowers will need to think about before making their decision.
First, the positive side. You'll simplify your life with one monthly payment that will come from one lender (and one point of contact if you have any questions). Because you are extending your loan's term (or how many years it's going to take to pay back your consolidated loans), your monthly payment will be lower. That's where the term "payment relief" comes from. Loan terms range anywhere from 10 years all the way up to 30 years. And the interest rate on a federal consolidation loan is fixed--which is unlike variable interest rate loans that can change. Your consolidated loan's interest rate will be equal to the average of all the student loans you want to consolidate, which is then rounded up to the nearest 1/8 percent. The maximum rate your loan can be is 8.25 percent.
In addition, there are no fees, credit checks or prepayment penalties related to your consolidated loan. And, lenders are aggressively courting your business with incentives - called borrower benefits or rewards - that can offer you cash back, reduced rates, principal reductions and other goodies.
That's all the good news.
Now for the considerations that make student loan consolidation not the right choice for everyone. First, you have to realize that by extending the length of your loan period (which does lower your monthly payments) you are adding to the total cost of the loan because of the extra time that interest on your loan is being charged. Put another way – you might end up spending more money in the long run.
If you still have federal loans with variable interest rates, another consideration is that by locking in that one rate, you protect yourself if interest rates rise in the future. However, if interest rates go down, you are still locked in to your rate. Also, some new federal loans already have fixed rates. Consolidating these newer loans keeps the rate fixed, but it might get rounded up a bit. In addition, when you agree to the terms and conditions of your new consolidated loan, you lose all of the terms and conditions of your previous student loans. That’s important because some benefits to you that were contained within your previous loans might not be included, or may be different, in your new consolidated loan. Make sure you carefully read and compare how your original loans stack up against your new consolidated loan.
PROS
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One monthly payment
One lender to contact
Lower monthly payment = more cash in your pocket now
No fees / No credit checks / No prepayment penalties (so when you win the lottery, you can just pay it all off...)
"Borrower benefits" – like cash back and reduced rates - can sweeten the offer
CONS
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Total cost of the loan can be higher because of the longer repayment term
Interest rate could be slightly higher than on your unconsolidated loans
You could lose borrower benefits (if any) on your unconsolidated loans
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