When should I consolidate student loans?
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UPDATED: Sep 26, 2012
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When debt becomes overwhelming then it is time to consolidate student loans.
Consolidating student loans is similar to refinancing. Borrowers looking to consolidate will get a new loan with a new interest rate, and that new financing will be used to pay off old student loans. Borrowers then need to only make a single monthly payment for a single loan.
Deciding when to consolidate student loans is an important decision that borrowers should review prior to undertaking. Borrowers will know when to consolidate their debt by looking out for these red flags:
- Multiple loans
- High or variable interest rates
- Inability to keep up with monthly payments
Some graduates have borrowed multiple student loans. These may be federal student loans such as subsidized and unsubsidized Stafford, PLUS, or Perkins Loans. Some student loans may be carrying drastically different interest rates.
For example, a borrower may have one student loan with a high interest rate and another with a low interest rate. This borrower can consolidate his or her student loans which would result in both old loans being paid off. The borrower would then only have to pay off the new loan which has an interest rate that is an average of the two old loans. That would also allow the borrower to make lower monthly payments on his or her new single loan when compared to the pre-consolidated loans.
Student loan debt with a variable interest rate is a red flag. If a borrower took out private student loans, they may have variable interest rates which can fluctuate and cause monthly payments to rise. Naturally, this can cause a problem for a borrower on a limited budget. Consolidating those student loans may be a wise choice, especially if borrowers can get a fixed interest rate. Thanks to fixed interest rates, borrowers can rest easy knowing that their payments will never increase from one month to the next.
Borrowers who are unable to make their student loan payments would greatly benefit from consolidation. Defaults can lead to soaring balances with compounding interest. In order to avoid this, consolidation may be the best course of action. A new consolidation loan can help defaulting borrowers by offering them lower monthly payments that may be more manageable. Likewise, the terms of a new consolidation loan may come with certain deferment periods, financial advice, and a more affordable repayment plan.