Should you consolidate student loans?
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It’s rare that someone has just one student loan. Even if your major stays the same and you stick to the same college and power through in four years or less, you won’t have just one student loan. You’ll have many. That’s one of the reasons it can be a challenge to get your debt under control in the aftermath of leaving college.
If you’re lucky and all your loans are with one loan servicer, it might not be so bad. However, that’s rarely the case, and you’ll likely have many different loans, at various interest rates, and with more than one loan servicer. One option that can simplify your student debt is consolidation, where all the loans convert to one larger one.
You’ll then have one loan, one servicer, one interest rate, and one monthly payment. Sounds nice, but is this the best approach? Let’s look at the pros and cons of consolidation.
The pros of student loan consolidation
Consolidation is a term that applies to federal loans. If you have private loans that you lump into one, that’s a refinance. If you migrate federal loans to a single private loan, that’s also a refi. With this option, the private lender pays off your fed loans and writes you a new debt obligation.
Some benefits of consolidation:
- One loan payment and one loan servicer
- One interest rate
- Possibly lower interest rate
- No application fee for consolidation in most cases
- Consolidating can pull you out of default
Some benefits of refinancing:
- Extended payment period beyond the 10-year standard term
- Lower interest rate if you have good credit
- Establishes a statute of limitation (which federal loans don’t have)
- Private servicers can’t garnish wages if you default
- Can be easier to shed private loans in bankruptcy
The cons of student loan consolidation
While consolidating or refinancing your student loans may simplify repayment and help you get organized, there are definite downsides, particularly if you ever struggle financially. Here are some things to consider about consolidation.
Some downsides of consolidation:
- If you were making payments towards PSLF, it might complicate things
- It could completely restart your PSLF payments
- You can only consolidate once – federal loans are one and done
- If the consolidation lengthens the loan term, you’ll be in debt longer
Some downsides of refinancing:
- Can’t participate in PSLF after converting federal loans to private
- Lose access to income-driven repayment options by switching to private
- Longer repayment period means longer in debt
- Private lenders may be more aggressive than federal servicers
Are you eligible for consolidation?
Before you decide that consolidating your federal loans is the best option, you should stop and think about the alternatives. If you earn a good income and won’t face any financial problems, consolidating or refinancing may be best for your finances.
The big issue is that federal loan consolidation is a one-time-only deal. Once you consolidate, you cannot do it again ever. That may sound like no big deal, but consolidation is more than just a matter of convenience. It is a get-out-of-default card you can only use once.
If you run late on your loans to the extent that you fell into default, you can consolidate and get a fresh start on your federal student debt. There are some conditions around consolidating defaulted debt. You must make three monthly payments on the debt first, then consolidate.
For those already in default, you might find it much harder to refinance than consolidate since private refi arrangements require a healthy credit score. Those in default might also want to consider whether bankruptcy might be a better solution.
If you’re older, partially or totally disabled, earning a low wage, never completed your degree, or have other conditions that indicate repayment poses an undue hardship, you might obtain discharge in North Carolina bankruptcy.
To discuss your student debt with bankruptcy expert, contact the Law Offices of John T. Orcutt. Read reviews then call +1-919-646-2654 to schedule a student loan bankruptcy consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.