While loan consolidation can sometimes dramatically lower a borrower’s monthly payments, Kevin Walker, co-founder of the college finance site Simple Tuition.com, says it can also cost you.
Instead of making multiple payments to multiple lenders, the borrower only has to pay off the new consolidation loan, says Michelle Pezzulli, vice president of operations for Credit Union Student Choice, a student lending service provider in Washington, D. “That new loan will have its own interest rate; it will have its own repayment terms; it will have its own terms and conditions,” she says.
This can be attractive to borrowers because the consolidation frequently results in longer repayment periods and lower monthly payments.
“If the terms you’re going to get are the not as generous as the terms you already have, consolidation is probably not a good idea,” she says.
Regardless of whether consolidating federal or private loans, there is a catch.
These include deferment — the ability to suspend payments under certain circumstances such as serving active military duty, attending further education or unemployment — and forebearance, which allows borrowers to postpone payments while still accruing interest, in cases of financial hardship.
Federal loan borrowers can also lower their monthly payments by extending the life of their loan, having their payments capped according to their income and by having their debt dismissed after making 25 years of consecutive payments under the income-based repayment plan.Consolidating both types of loans excludes borrowers from federal protections.When eyeing consolidation options for private loans only, Mayotte says borrowers should evaluate the new loan’s hardship protections and repayment terms in addition to the interest rate.Consolidating private loans works in a similar fashion, as far as paperwork goes.The difference is you’ll need to apply through a private lender.When it comes to consolidation, the types of loans you have matters, but most federal loans, including Stafford, Perkins, Direct Plus and Supplemental loans, can be consolidated with other federal student loans.