Sunday, 29 September 2019

Is It Smart To Consolidate Your Student Loans?

We are going to be talking about student loans and specifically consolidation. How it works, why you might want to do it or not want to do it, and how it's different and sometimes considered the same as refinancing. You might have a lot of student loan payments from different loan balances that you have out there, and you are wondering is there s simpler way to make all of these payments? And, yes, that is through consolidating them.

Let's Talk About Student Loan Consolidation

Consolidating your student loans basically means that you are taking all those loan balances that you have and pulling them together in one place, so, instead of making several loan payments, if you do have several loans, you will be making one payment. You will get a weighted average interest rate on those several loans that you have. This is a simpler way to pay off your student loans but it's not necessarily the best option, and I am going to tell you why. First, it's important to understand the difference between consolidating federal and private student loans.

You can absolutely consolidate your federal student loans and it will look like I explained, taking those balances, putting them together, getting a weighted average interest rate, and getting one loan payment. In this situation it's not necessarily going to be more expensive or save you any money when you consolidate your loans, you are just combining it, so, you don't have to make several different loans. but the interest rate essentially stays the same. You are just combining them and getting an average.

You can consolidate your federal student loans and get a direct consolidation loan. The confusion comes in when people talk about consolidating their private student loans or even consolidating their private with their federal student loans. You can not technically combine private and federal student loans. If you have both and you want to pull them all together just to have one loan payment, you actually have to go through the refinance process. This means that you have to apply, they are going to look at your credit score, they are going to get you an entirely new interest rate and buy out all your old loans to give you a new loan at this new interest rate and then you will get that one payment that you have to make.

This exact same process is applied if you only have private student loans, technically you can't consolidate your private student loans, you have to go through that refinance process. 

Whether It Is A Good Idea For You Or Not

I am going to talk about a couple different situations. Let's say that you have all federal student loans, your rate is good, you can choose whether you consolidate them or not. One side note is you can't consolidate parent PLUS loans so that is a bummer. But you can consolidate all other deferral loans and you just have to decide if that is right for you. If you are more motivated to pay down smaller chunks at a time and seeing one chunk being paid off and then moving to the next, if that is motivating to you, then I would not consolidate. But if you feel like you want a simpler process for paying off your student loans, then it's okay to consolidate those federal student loans.

What if you have only private student loans, well,. you might be facing the opportunity of getting a lower interest rate because sometimes private student loans can have higher interest rates. That means it would be in your better interest to go through the loan application process. What you want to do is make sure your credit score is up to snuff, because they are going to be looking at your past credit history and make sure that you are a good credit citizen before they give you a new interest rate. And ideally, you would want that interest rate to be lower than the current interest rates that you are paying on those student loans. When you consolidate aka refinance your student loans, you do run the risk of ending up having to pay more in interest because of that whole refinance process.

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