When Consolidating Student Loans Makes Sense

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The month of May has always marked the time when college students across the nation finally make their walk across to receive their diploma. Many students were fortunate enough to receive scholarships and grants, while others took out student loans, even using extra money for shopping sprees. The average college student graduates from their undergrad program with about $24,000 in student loans. (Source: Q1 2013 FRBNY) The overall amount of delinquent student loans is about $909 billion, with $986 billion in total student loans.

If you are a college graduate now faced with student loan debt, you may want to consider consolidating your loans into one lump sum. This process is not ideal for everyone though, so you need to make sure it is right for you. Here is an overview of when consolidating student loans makes sense.

How Student Loan Consolidation Works

8641396_sStudent loans come in three forms: student loans, parent loans (PLUS program) and private student loans. You may only have one type of loan to pay off, but chances are you have several that you picked up during your education. Consolidating student loans can greatly simplify the process of remembering what you owe, to which company, and when the payment is due. This process combines multiple types of student loans into one loan, so that all you have to do is make one payment each month. There are fees associated with the combination that may alter its effectiveness, but for some students, consolidation actually saves money in interest. You have to decide where your debt stands and whether or not this option will help you get rid of student loan debt.

Is Loan Consolidation Right for You?

Evaluate all of your repayment options before considering consolidation to be sure you’re taking advantage of the best repayment plan available. When considering consolidation, ask yourself the following questions:

  1. Am I unable to manage my payments already? Loan consolidation makes sense if you are often forgetful and could potentially miss the payment date for one of your student loan providers. Missing a payment is not a good choice and can hurt your credit score. By streamlining all of your payments into one payment, you’ll be more successful at remembering one date. Set a reoccurring reminder in your phone a few days before the due date. I put a reminder in a week before it’s due and also the day before it’s due.
  2. Am I unhappy with my current interest rate? Interest rates can be very costly over the years, especially if you’re paying interest on a large amount of debt. If that’s a concern for you, try consolidating your loans together with the goal of receiving a lesser interest rate. The end-goal is to pay less, not more. Do NOT consolidate if your interest rate increases, causing you to pay longer on your loans.
  3. Do I have other debts that I need to pay on? Paying your student loans is great, but not if doing so means you forget about other financial obligations. If you have other debts to cover after college, you may consider consolidating all of them. Then you will have a single payment to make each month to cover all the money you owe.

If you answered yes to any of the above, consolidating your student loans makes sense. If you can’t make payments on anything, even with a lesser interest rate through consolidation, you may want to consider putting in a request for a forbearance or deferment. Here’s a great resource for all your consolidation questions, glossary of terms and a list of what can and can’t be consolidated.

Important Factors to Remember

Check the terms of your student loans so you’re aware of important dates, like when the interest may increase and when you will begin paying on your loans. If you’re pursuing your master's degree, you get to hold off on paying back your loans until you’re done with that program. If you are through with your education, you have 6 months before you will have to start paying your student loans off. Use that time to come up with a plan and stick to it.

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