You might find entering repayment after graduation to be a bit of a challenge. You’re starting a new phase of your life, launching your career, and adjusting to a whole new set of responsibilities and freedoms. Trying to figure out the best way to handle your repayment plan adds another dimension of complexity to the equation.
An important step in managing your financial future is to make sure that you have student loans to meet your needs. Many graduates are considering student loan consolidation as a way to simplify or possibly reduce their payments. There are potential benefits to loan consolidation, but there are potential drawbacks for some borrowers as well. It’s worth taking a careful look at the options and how they relate to your individual situation before making a decision.
Simplified payment schedule
One of the things that makes dealing with student loans so complicated is that often, when you apply for student loans, each semester gets its own separate loan which must be repaid separately. Each has its own payment schedule and its own interest rate. Keeping track of all these payments can become quite the task. If you end up missing payments, you may incur late fees and additional interest costs. These missed payments may damage your credit score and may also affect your ability to borrow money for future purchases such as a car or home.
Improved cash flow
Consolidating your student loans may result in a lower monthly payment, which makes things more manageable for a recent graduate who may not have a large salary or full-time job yet.
Some private student loans have a variable rate which can be consolidated into a loan with either a lower variable rate or one with a fixed interest rate, depending on the terms. When you consolidate your loans, you can lock in a fixed interest rate for the life of the loan. By taking advantage of the current low rates, you could end up saving a significant amount over the years.
You may end up owing more in the long term
Unfortunately, the low payments often come with a cost. By lowering your monthly payments, you may be extending the life of the loan by years. Interest is charged on your overall balance, so the longer it takes you to repay the loan, the more interest you will rack up over time. You may reduce the amount of interest you pay over the life of the loan by paying as much as you can afford each month, on top of your required payment amount.
You will lose your grace period
Typically, there is a 6-month grace period after graduation before you need to begin making payments on your student loans. Your student loans will begin repayment immediately once you consolidate, so make sure you are ready to begin payment in full.
You may be required to obtain a student loan cosigner
It’s not necessarily a negative, but it is something to be aware of. If you are consolidating private student loans and you don’t meet the income or credit history requirements, you might need to ask someone to cosign your new loan. Your student loan cosigner will be liable for the amount borrowed in the event that you cannot make your payments. Therefore, choosing a student loan cosigner is something to consider carefully. You may be able to release your cosigner from the loan after as few as 24 months of on-time payments. This option varies, so check with your lender on what terms they can offer.
You may lose some benefits from your original lender
Lender-specific benefits as well as any cancellation provisions will not transfer when you consolidate. If you think you might be able to take advantage of any of these benefits, consolidation might not be right for you. Make sure you understand all of the terms of your existing loans as well as your potential new loan, to make sure that you won’t lose out.
Student loan consolidation is a useful option for many graduates. Explore all your options so that you can make a decision that works for you.