Should You Consolidate Your Student Loans?
Consolidation: you may get ads about it, or it may be mentioned when you are talking to a student loan servicer. Consolidation of student loans is often sold as a cure-all to your student loan problems. Although consolidation does have some benefits, before consolidating, it’s best to understand how the process works.
What is Consolidation?
The type of consolidation that we’re discussing here is only for federal student loans. You can consolidate for private loans, but those loans are from private institutions, unregulated, credit-based, and not recommended unless you get a very favorable interest rate. Consolidation of federal student loans is not credit based—you do not need to have credit to get a consolidation loan.
If you have a significant amount of federal student loans, you may realize that what you owe is not just one giant loan, but rather, a series of individual, smaller (relatively speaking) loans. Each may have their own interest rate, their own servicer and each sends you their own statements or invoices for payment. It can get terribly confusing figuring out what is owed to who and which company you just paid and which you didn’t. If you want a forbearance, or a hardship waiver, or want to apply for a payment program, you must ask for these programs separately, for each loan.
This is where consolidation comes in. Much like refinancing a house, a consolidation loan is one giant loan that “pays off” your student loans. You then have one loan, and one loan servicer to deal with. Generally, your interest rate won’t go up significantly.
Unfortunately, you cannot consolidate federal and private loans together. You can only consolidate federal student loans with each other.
Benefits of Consolidation
One huge benefit is that consolidation can get you out of default. You will be considered current once you consolidate. However, this can also be a con because you only get one consolidation loan. That means that if you consolidate now, and then later you have financial hardship and default on your loans, you will have used up your consolidation. Unfortunately, many servicers and even some schools push graduating students to consolidate immediately.
Income Based Payments and Other Programs
Your consolidation loan can be used with all the government programs that your original loans were, such as income based repayment (IBR), or disability hardship waivers.
In fact, some federal loans that cannot be paid with income based payments, such as indirect federal loans (which no longer exist) or Perkins loans, would be eligible for IBR after consolidation.
The one exception to this is what are known as “parent plus” loans. If you have these, you should discuss consolidation with an attorney or other professional before consolidating. Consolidation these loans with your other student loans could result in losing your ability to apply for IBR.
It does not cost anything to consolidate, and anybody who tries to charge you an exorbitant fee to help you consolidate should be avoided. An attorney consultation can be helpful just to make sure that consolidation is right for you, but nobody should charge a fee for the act of consolidating federal student loans.
Questions about your student loans? Contact the Miami consumer rights attorneys at Jacobs Legal to make sure that you understand the programs that are available to you.