Loan consolidation means taking out new loan to pay off two or more existing loans. As far as student loans go, consolidation mostly refers to federal loan consolidation, and when you do the same thing with private loans it’s “refinancing.” But no matter what you call it, consolidating your student loans can be a good thing or a bad thing depending on what the loan terms look like before and after. That’s why you need to prepare and learn about the process before you jump in.
What Are Your Current Payments and What Can Change Them?
When you consolidate or refinance, your goal is to bring down your monthly payments. But while it’s simpler to pay off a single loan instead of three or four, those three or four payments could be lower even if you add them all together. Aside from adding all the loan payments together and comparing them to your restructured loan payments, you should also see what conditions and perks you might have with your current loans. Some federal student loans can be forgiven if you can’t pay them, and some private loans will let you suspend payments when you’re unemployed.
How Do the Interest Rates Compare?
The interest rate decides how much money you’ll eventually pay for your student loans. A fixed rate is more predictable, but a variable rate can often save you money if you make it through the high-interest years. A longer loan term means smaller monthly payments, but it also means the loan will stick around longer and the interest rate will have more time to add to the loan’s size. You need to keep all this in mind when you’re shopping for a new loan and not just look at the monthly payments.
Is the Lender Good at Handling Student Loans?
This is especially important if you’re thinking of consolidating a federal loan into a private loan. Most federal loans have excellent terms since they aren’t for profit, and the terms on your refinanced loan should be competitive with that. Since each private lender sets its own requirements and loan terms, it helps to shop around and look for the lenders with the best student loan terms.
How’s Your Credit Score Doing?
An improved credit rating is one of the best reasons to consolidate and refinance. When you were a teen, you probably didn’t have a credit record, but as an adult with a steady job, an auto loan, and a few credit cards, you could have a very solid credit rating with some equally solid loan options and no need for a cosigner. Consolidating can get you a better deal because you’re taking out a new loan based on your new credit score, and it lets your cosigners off the hook.
Like with any major purchase or loan, it’s worth your time and patience to go through all the information before you sign and initial any papers. Consolidating student loan debt can give you lower monthly payments, but higher interest rates and fewer perks can mean the consolidation isn’t worth it.