If you’re wondering, should I consolidate my student loans? You’re not alone. In the United States, Americans owe a shocking $1.73 trillion in student loan debt. That’s a trillion more than the credit debt in all of the country combined.
With a student loan consolidation, you can often combine several student loans into one convenient payment. There’s no more worrying about which loan payment is due when. To help you decide if student loan consolidation is right for you, we’ll go over all the pros and cons.
Consolidating vs. Refinancing Student Loans
Consolidation and refinancing are often confused. With consolidation, you roll multiple federal student loans into one loan. The loans you’re combining are paid off and put into one new loan for the total amount. Private loan consolidation is actually almost always a refinance.
With a refinance, you combine multiple private and federal student loans into one private loan. You can only consolidate federal student loans. A refinance can be done with both federal and private loans.
With a student loan consolidation, you actually aren’t lowering your monthly payment through a lower interest rate. Instead, your payment gets lowered due to a longer loan term. Essentially, you can make more payments over a longer period of time and lower your monthly payment.
With a refinance, you are able to lower your monthly interest rate. This can save you a lot of money over the long term. One drawback to a refinance is that you’re unable to utilize federal protections and forgiveness programs as these loans are through a private lender.
How Does a Student Loan Consolidation or Refinance Work?
With a student loan consolidation, only federal loans are eligible. You’re essentially taking multiple federal student loans and rolling them into one loan. If you’re looking to combine one federal loan with two private loans, this is technically a refinance.
Your refinance, however, will work much like a federal loan consolidation in several ways. To start, you’ll take more than one loan and roll them together to form one new loan. You’ll have a new interest rate and a new payment amount. If you refinance through a private lender, you’ll also have a new bank in which you’ll make your payment.
With a federal student loan consolidation, you continue to make your federal student loan payments as you did before, however, you now have a new loan amount. This amount will combine each loan you consolidated. One of the best things about consolidating through the federal student loan program is that you’re able to customize your payments to keep them affordable.
With a federal student loan consolidation, you’re able to spread out your payments to make them more affordable each month. It’s important to remember that you can only consolidate federal loans with federal loans. If you’re refinancing, however, you can combine federal loans with private loans.
The Benefits of Student Loan Consolidation
The idea behind a student loan consolidation or refinance is to make managing your payments easier. With a refinance, you can also get a lower interest rate depending on your financial situation. For many adults, your income and credit are higher in your 30s as opposed to 19 when you first opened your student loan.
With an improved financial situation as an adult, you may qualify for a lower interest rate on a private loan consolidation or refinance. This can save you a great deal over time. If you’re having financial difficulties, you may be eligible for payment deferment or adjustments through the federal student loan program.
When you have four different student loan payments with multiple banks, it can be really difficult to keep track of everything. Not only are you making payments to different banks, but you may also have different due dates. Consolidating your student loans will streamline the process.
With a student loan consolidation, you will have one easy payment. You can make one payment each month to the same bank or through your federal loan provider. This also improves your monthly budget and debt ratios.
Creating a Student Loan Budget
If you’re planning on consolidating or refinancing your student loans, it’s helpful to have a student loan budget in mind. This means carving out enough money to make your new monthly payment and maybe even additional payments.
Student loans don’t go away. In fact, even with bankruptcy, you’re unable to get rid of student loan debt. Student loan debt is very serious if left unpaid. Missing payments could result in collections or wage garnishment.
To help ensure you can afford your monthly loan payments, creating a budget is key. A budget will help you see what income is coming in and what expenses you have. Writing everything out allows you to see where you can make cuts if needed.
Student loan debt is considered a fixed expense. This means your student loan payment has to be paid no matter what. The same goes for rent or mortgage payments. Gym memberships and music subscriptions aren’t fixed expenses. These types of expenses are where you can trim if needed to make sure you can make your student loan payments.
Make a Plan to Pay Off Your Student Loan Debt
After viewing your monthly budget, you may find you need to make some budget cuts. If you need to do this to make your monthly student loan payments, do so. If you’d like to go a step further and make a plan to pay off your student loan debt early, consolidation is a great way to do so.
To start, see what bills or expenses you’re paying that you don’t need. You may be surprised after writing everything out that you pay for two different music streaming services. Maybe you’ve been paying for a gym membership you haven’t used in two years. These are things you can cut to give yourself more money each month.
Once you have a little extra cushion, make a plan to pay off your student loan debt sooner. This could mean making an extra payment each year or adding a small amount to your monthly payments. A student loan consolidation will help you streamline your loans into one easy-to-manage payment.
For some, paying off higher interest debt first makes more financial sense. In this case, a student loan consolidation is still worth the time. Your new student loan may have a lower interest rate, allowing you more money each month to pay off your credit cards or high-interest loans. The more you can save on interest or loan payments each month, the more you’ll have to pay off your debt sooner.
Why Your Student Loans Matter in the Future
Your student loan debt will affect you a lot more than you think over the years. To start, your debt-to-income ratio affects everything from your ability to get a mortgage to your interest rate. Your debt-to-income ratio refers to the amount of debt you have compared to the income you’re bringing in.
If you have a lot of student loan debt, this will raise your debt-to-income ratio. Your debt ratio adds all your debt together to see how it compares with your income. If you have a mortgage, student loans, a car, as well as credit card debt, this all gets added together. You’ll see higher interest rates for everything from cars to mortgages.
A consolidation loan or a refinance may help you reduce your debt sooner. If you have a lower interest rate, for example, you’ll see a lower monthly payment and more principal being paid off each month. With a lower monthly payment, you may also be able to pay down other debt to get your ratio lowered. Too much debt means you’re a riskier candidate for a loan.
Before taking out a student loan, paying a loan off, or consolidating, take a look at your overall finances. A student consolidation might be what you need to get a lower interest rate or help spread out your payments over a longer loan term.
Pros and Cons of Student Loan Consolidation
With any loan, there are always benefits and drawbacks. With a student loan consolidation, there are a few big factors to consider. First, take a look at the type of loans you have.
If you only have federal loans, it will likely make more sense to consolidate all of these into one new federal student loan. From there you can decide how long you’d like to make your payments. If you’re strapped for cash, you can spread out your loan terms making smaller payments for a longer period of time.
If you have all private student loans or a mix of both private and federal, a private consolidation or refinance may be a better option. You likely have more of a credit history and a higher-paying job than you did when you first got your loan. This could translate to a lower interest rate.
One drawback to a federal consolidation is that you likely aren’t lowering your monthly payment due to interest. This means you’re making the same payment you were before. The payments are just streamlined into one. With a private refinance, you can significantly lower your monthly payment with a lower interest rate.
Consolidating Your Student Loans Boosts Your Credit Score
Your student loan debt is weighing down your credit score. If you have student loan balances, this could be lowering your credit score. In the United States, credit scores range from 300-850. A credit score below 579 is considered very poor.
If your score falls in this category, your debt could be dragging you down. To help boost your score, make your student loan payments on time and never miss a student loan payment. Making one payment through a student loan consolidation could also help you boost your score.
Every month you make your student loan payment on time, you’ll see your scores improve. The less debt you have, the higher your score. Your credit score affects everything from your interest rates to your ability to get a new job. Don’t let student loans affect your score later in life. Make a plan for reducing your student loan debt.
If too much student loan debt or missed loan payments are on your credit report, this will reflect poorly on your ability to handle debt. When you apply for a mortgage or a job, people are looking at your score to see how financially responsible you are. A low credit score doesn’t make a good first impression.
Should I Consolidate My Student Loans?
Are you wondering, should I consolidate my student loans? There’s no right or wrong answer to this question. If you’re having trouble staying on top of your student loan payments, loan consolidation might be a great option for you. If you have several higher interest loans, consolidation may also help here.
Your student loan debt could stay with you for a long time. Whether you choose to consolidate or keep your loans separate, make sure to have a plan in mind for paying off your loans. The sooner your loans are paid down, the sooner you can breathe easier knowing more debt is lifted off your shoulders.
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