Gone are the days when it was generally a good idea for most
federal student loan borrowers to consolidate their loans. The student loan
world has changed significantly, eliminating two of the biggest benefits of
consolidation.
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First, most federal loans previously featured variable
interest rates. These rates changed annually, so consolidation allowed
borrowers to lock in historically low numbers. In July 2006, interest rates on
new loans became fixed. Because consolidation interest rates take a weighted
average of the underlying loan rates, borrowers no longer automatically get a
lower rate by consolidating.
Second, in the past, it was common to have your federal
loans held by multiple servicers. By consolidating, borrowers could pay one
servicer instead of many. Now, most borrowers pay all their loans under one
bill from the start, thanks mostly to efforts on behalf of the Department of
Education.
With these benefits removed, borrowers may be wondering if
consolidation is even worthwhile. For many, the answer is, "not
really." However, it can still be a useful tool for some. Here are some
situations where it can make sense to consolidate student loans.
1. To obtain access to forgiveness or repayment benefits:
Student loan regulations and laws are complicated, but sometimes that can work
to the borrower’s benefit. This is true when it comes to consolidation, Parent
PLUS loans and Public Service Loan Forgiveness.
While Parent PLUS loans are technically eligible for PSLF,
it’s hard for borrowers to take advantage of this benefit. A borrower must make
120 payments under either a standard 10-year, income-based, income-contingent
or Pay As You Earn payment plan to qualify for PSLF.
The catch is that Parent PLUS loans are not eligible for the
three income-related payment plans, and a borrower paying under a standard
repayment plan will have nothing left to forgive after 120 payments.
If you consolidate a Parent PLUS loan under the Direct Loan
program, however, it becomes eligible for income-contingent repayment and
therefore has the potential to be eligible for PSLF. If the borrower wouldn’t
otherwise be eligible for PSLF, having access to this option could make
payments much more manageable, especially if the borrower still owes money when
he or she retires.
On a related note, as only Direct Loans are eligible for
PSLF, borrowers with older Federal Family Education Loan Program loans can use
consolidation to transfer those loans into the Direct Loan program to gain
access to PSLF.
Consolidation can work the other way too, especially when it
comes to Perkins loans. Many unique forgiveness opportunities available to
Perkins loans are lost when they are consolidated, so make sure you do your
research before taking this step.
2. To obtain a lower payment: While income-related payment
plans provide much needed relief for many, those lower payment amounts may
still be too high to manage. For those borrowers, especially those with lower
loan balances, extending the term of the loan through consolidation may
actually yield a lower payment than some other repayment options.
This calculator can help weigh all of those options at once.
Just remember that the longer you take to pay the loan, the more you will pay
in interest.
3. To manage private student loans: The benefits of student
loan consolidation have increased when it comes to private student loans. While
it is generally not advisable to consolidate federal loans with private loans
since you’ll lose the federal benefits, consolidating your individual private
loans may make sense.
There’s been a significant increase in lenders offering a
private loan consolidation product, increasing the competitiveness of these
products. Borrowers can often find a lower interest rate and more favorable
terms, especially if they have a good payment history on their existing private
loans to date.
At the very least, private loan consolidations can extend
the term of your loans, lowering the payment. As we’ve discussed in the past,
private loans have very few lower payment options, so consolidating to a longer
term with a lower payment can sometimes be the only option available.
If you have good credit and payment history on the loans you
want to consolidate, this can also be a way to release the co-signer from
responsibility of those underlying loans. The co-signer will not automatically
transfer to the new loan product, so if you do still require one to
consolidate, you’ll need to find a new one, or ask your existing co-signer to
re-up his or her commitment.
4. To get out of default: If you’ve defaulted on your
federal student loans, consolidation is the fastest way to get the Education loan in India
out of default. Consolidation is not as beneficial as loan rehabilitation, as
consolidation doesn’t remove the default from your credit history. However, if
you’re not eligible for rehabilitation or can’t take the time to complete that
process, consolidation can get your loan back in good standing.
A good place to start to determine the pros and cons of
consolidation will be your student loan holder, which will have a good
understanding of how consolidation will benefit – or not benefit – your
particular situation.
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