Loan Consolidation

Combining multiple debts into one monthly payment

Many students graduate from college deep in debt as a result of student loans from more than one lender. Each lender may have a different interest rate and require payments at different intervals. This can be quite confusing. A solution to this is to consolidate your student loans. Debt consolidation refers to the practice of combining several smaller loans into one single, large loan from a single lender. In a financial sense, it is similar to refinancing your mortgage.

Student loans can only be consolidated after you’ve stopped attending college, either during your grace period or once your loans have entered the repayment stage. Even loans that are in default can be consolidated. Both students and parents can consolidate their own loans, but they cannot combine them because only loans to a single borrower can be consolidated. Parents are eligible to consolidate their PLUS loans before their child has finished school.

Consolidation can be done through either a private lender or a federal consolidation loan. Few private lenders will consolidate loans with balances totaling less than $5,000, but there is no minimum for a Federal Direct Consolidation Loan.

Advantages of Student Loan Consolidation

The main advantage of consolidating your student loans is that it makes things easier for you. Instead of worrying about making multiple payments, you will only have to make one payment per month. You won’t have creditors calling you and asking about the status of your payments. You are also much less likely to miss a payment and hurt your credit rating.

Another advantage is that you can reduce the interest rate that you pay if you consolidate at a time when interest rates are lower than when you originally got the loan. Even if you end up with a higher interest rate, you will be locked in and protected against future increases in interest.

Disadvantages of Student Loan Consolidation

Once you consolidate your student loans, you can’t undo it. This can cause problems if you ever decide to go back to school, and it can be frustrating if the interest rate drops below the rate you locked in at.

Also, keep in mind that you can’t consolidate credit card debt with student loan debt (although some private companies allow you to consolidate debt from multiple credit cards) since credit cards have much higher interest rates.

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