Student loans have affected lives all over America. Students are taking out more loans than ever as the cost of higher education is on the rise. Unfortunately, graduates are unable to pay the loans in many cases because they can’t get jobs that pay enough to cover the cost of the monthly payments. This leads to many people defaulting on their loans and destroying their credit straight out of college. One consideration for those in this situation is to consolidate their current federal loans to lower monthly payments and give them a new chance to defer the payments until they are making enough to cover the cost of the loans.  

Federal Student Loan Consolidation

1.4 trillion Americans are facing student loan payments that will take approximately 10-30 years to pay off and 1 in 10 Americans will default on their loans because they are unable to make the monthly payments because they can’t afford them. So what is the deal with federal loan consolidation? Is it a good option or will it just make things harder in the long run for college graduates just trying to keep their heads above water?

Pros of consolidating federal loans:

1. One Monthly Payment and One Locked In Interest Rate

Many students have multiple loans by the time they graduate because they have to take out new loans every semester. This means multiple minimums and multiple interest rates. Consolidating will make it so graduates have one minimum payment each month and one interest rate that will be locked in for the life of the loan.

2. Multiple Repayment Options

When you decide to consolidate your loans, you will be given multiple options with different payment amounts and terms that will make repayment easier for the graduate as they get into the new loan agreement.

3. Avoid defaulting on your loans

When you decide to consolidate, you cannot only sign up for a new payment amount, but the deferment terms are reset. This allows the graduate to defer their payments for an additional three years until they are in a better situation monetarily and they are able to make the payments comfortably rather than defaulting on their loans and destroying their credit.

4. Auto debit option with possible loan reduction

When you set up your new payments with the bank for the consolidation you can set auto payments up so that the money will be taken directly out of your account each month. When you choose this option, some banks offer a discount in the interest rate.

Cons of federal loans consolidation:

1. Pay more interest over time

With a new payment term, comes a new interest term. If the new term goes longer than the old term you will end up paying interest for a longer period of time. This will add up over the years you end up paying the loan.

2. Rounded up interest rate

The interest rate for the consolidation loan will add 1/8 of 1% to the weighted average loan amount from the old loans.

3. Lose out on current benefits

For people who meet specific requirements, some loans have cancellation benefits that you may lose if you consolidate.

4. Lose benefits from lenders

For people who meet certain requirements, some lenders provide reduced interest rates and principal reductions. You will lose these benefits if you consolidate.

5. No private loan consolidation

If you have private loans, they cannot be a part of the federal loan programs.

6. No do overs

You can only consolidate your federal loans once. If the interest rates go down and you have already consolidated you will be stuck with the rate you have.