To Consolidate or Not?
The Potential Pros and Cons of Consolidating your Student Loans.
Many young students require a student loan to pay for college. A college degree is an investment after all, and thanks to the help of substantial student loans, many young men and women are able to credit their way to a successful future – one that they wouldn’t have the opportunity for without a student loan.
A $15,000 to $20,000 loan seems like a large responsibility for a young student, but not when you figure that a college graduate will earn roughly 65% more per year compared to his or her colleagues who didn’t get that diploma. Furthermore, student loans are typically paid off by the time the average student reaches the age of 35. You can’t really put a price on a bright future now can you?
The same CBSnews.com article looked to a study done by Mathew Greenwald Associates on 1.500 post-college students demonstrating the financial difficulties brought on by student loan payments. The study stated the following:
- 44% said they couldn’t afford to purchase a home after college because of student loan payment.
- 28% said they couldn’t afford to have kids due to hefty student loan payments.
- 27% claimed they couldn’t afford the cost of annual dental check ups.
- 32% said they had to move back in with mom and dad after college due to high student loan payments.
As mentioned, student loans are a young adult’s first brush with credit – and the repayment schedules and budgeting that it entails. For many paying back student loans is harder than 4 years of college combined. However your credit future depends on your ability to make your student loan payments on time. Many students panic and need to resort to other forms of credit or cash advances to make their student loan payments. If you don’t, you could be denied credit cards, mortgages, car loans, personal lines of credit and even rental properties.
The way you pay off your student loans – either responsibly or irresponsibly – will follow you around like a plague, and that plague is referred to as your credit history. Your credit history is a detailed log of all of the credit payments and activities that you make – or don’t make. Your credit score, the 3 digit number that creditor base their lending decision on will all depend on if you’ve handled credit responsibly or not.
I don’t in any way mean to deter you from getting a student loan. It is truly an investment in your future. Handled responsibly it can open golden opportunities both professionally and financially for you. On the flip side, a young adult who is responsible during the repayment period of their student loan will be offered the best interest rates on credit cards, the most flexible mortgages, and they will be pre-approved for personal and car loans with zero hassle from creditors. The key is knowing the most effective way to pay back your student loan, and that plan may involve consolidating your student loan.
The pros of student loan consolidation
Consolidation of your student loans means that your various loans from various lenders will be combined into one loan and paid off in one lump monthly sum to a sole lender. Loan consolidation for student loans tends to stretch out the term of your loan (the length of time it will take to pay the loan off) so that you’re monthly payments are low and manageable.
Consolidating your student loans is beneficial for the following reasons:
It’s simple – Instead of having to keep track of various loan payments to different lenders – all due at different times, a consolidation of your student loans will have you just making one monthly payment that will take care of making payments to all loans and lenders.
It fixes your interest rates – It’s hard to keep track of the interest rates on all of your various student loans. It’s doubtful that you’d even realize if one or more went up! When you consolidate your student loans, all loans from various lenders are now covered by the one loan under the same fixed interest rate. A fixed interest rate means that this interest rate will never change.
You determine payments – The whole reason you would consolidate your student loans is to make the payments easier for you. That’s why when you decide to consolidate you will sit down with the lender to hammer out a repayment schedule that works for you. This means if rent comes out at the first of the month, you might want to have your loan payment come out on the 15th of the month when you get paid again.
You chose your repayment option – With a regular student loan, you signed the paper and had no say when the repayment started. However 6 months after you graduated you likely saw chunks of cash coming out of your savings account at various times during the month. This is because you don’t have a say in when and how much comes is paid out to student loan creditors. However when you consolidate your loan, you do have a say.
The cons of student loan consolidation
Student loan consolidation is no-brainer for most students; however there are drawbacks for students with specific loans:
Student loan programs that offer loan-forgiveness - If you funded your education based on a federally subsidized Perkins loan – these student loans are specific to students pursuing teaching, law enforcement, law or military professional degrees, and they award loan-forgiveness to students. If you consolidate a Perkins loan you will lose any loan forgiveness you could qualify for.
The repayment plan you choose could end up costing you more – Extended and graduated repayment plans will have you making student loan payments for up to 30 years. This sounds great when you figure you will be making on minimal monthly payments on your loan, however it doesn’t look so peachy when you consider the interest on a loan with a 30 year term (length). You are looking at thousands in interest payments alone. Sure, you may need to make minimal payments within your first year of graduation, but 5 years into the future when you are making a decent salary you will be able to make higher payments. This is why the income-based repayment option may be a better one for you. It will allow you to pay minimal payments on your student loan when you can’t afford more, and offer the flexibility to make higher payments and get that loan paid off once you are earning more money. Take a look at the repayment options for consolidated student loans below, and choose carefully:
- Standard consolidation repayments – will have you making fixed monthly payments for up to 10 years.
- Gradual consolidation repayments – This means that your monthly student loan payments start off low for the first 5 years of your loan. The idea is that after 5 years you will likely have a stable job in your profession and be making a higher salary, so you will gradually pay higher amounts during the next 5 to 10 years.
- Extended consolidation repayment – This option offers a 15 to 30 year student loan repayment plan. The monthly payments are minimal, but keep in mind that the interest is higher because the loan takes longer to pay off.
- Income-based consolidation repayment – Your monthly student loan payments are based on a number of income factors including your salary and how many dependants you have.
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