Consolidating Loans: Is it Right for You?

It can be a hassle to have any loan, whether big or small. Having to keep track of when your payments are due, how much interest you have to pay (if you have a variable interest rate), and also worrying about what will happen to your credit score if you have a late payment and have to deal with creditors can be very stressful. That stress can double or triple if you are dealing with multiple loans.

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Although Stafford and PLUS loans now have fixed interest rates, many students still might benefit from consolidating loans. Consolidating loans isn’t the right choice for everyone for several reasons. However, loan consolidation is the best choice under certain circumstances, and having one payment to make each month isn’t the only reason to consolidate. There are many benefits and also some negatives to consider when contemplating consolidating your loans.

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The most obvious advantage to consolidating your loans is the fact that you can have a single monthly payment. This might help you if you are often late because you can’t keep track of your loans, or if you just want to worry about one interest rate and not have to keep track of several different loans with separate interest rates and due dates. You also might find that repaying your loan becomes easier when you can easily keep track of how much you owe by only having to pay attention to one loan, and therefore you might be able to pay extra toward the principal amount each month.

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Another advantage to consolidating your loans is that you will only have to deal with one lender. If you make your payments regularly, this shouldn’t really matter, but if you sometimes miss payments or you suffer a temporary financial hardship, dealing with several different lenders can make things more difficult. Continually paying late will affect your credit score. If you don’t know what your credit score is now, you should find out, because a poor credit score can make it difficult to obtain other loans.

Another advantage to consolidating your loans is that you might be able to secure a better interest rate, which can help you make your payments on time or in a quicker fashion, which will improve your credit score. You also may find that by consolidating your loans you have a larger choice of repayment plans with different terms. For example, some plans are income contingent: with this type of loan, if your circumstances change, your terms might, too. The Income Contingent Repayment (ICR) for students is actually designed to help students repay loans even if they are entering a job field that doesn’t pay very well. The payment amount is adjusted each year based on annual income and family size.

One last potential advantage of consolidating your loans is that a consolidated loan is a completely new loan, which means that if you faced a forbearance or deferment before, you might be eligible again.

There are also disadvantages to consolidating your loans. If you have at least one or two loans with a really low interest rate and terms that you like, you will lose the terms and the interest rate if you consolidate. Also, if you have a grace period on your loan, you will lose it if you consolidate the loan. Many student loans include an opportunity to lower your interest rate if you pay your monthly payment on time for a certain amount of months, and you may lose this option if you consolidate your loan.

If you have government student loans, it may be less beneficial for you to consolidate because many private loan companies have higher interest rates and many do not have the same consumer protection that student loans have. In addition, you need to be careful, because you can only consolidate student loans once. Government student loans often have low interest rates, as well as many options for repayment; they also offer flexibility regarding forbearance or deferment. If you are planning to go back to school, you also need to be especially careful when considering whether or not to consolidate your loans.

Determining whether you should consolidate your loans can be tricky. Obviously, a key first question to ask yourself is if consolidating your loans will actually save you money. If you are happy with the terms that your current loans have, you may not want to consolidate. On the other hand, if you can save money, and especially if you have trouble keeping track of multiple loans, loan consolidation might be the best choice.