Consolidating loans pros and cons

Consolidating loans pros and cons

Historically, that may have been accurate, since consolidation was often used as a way to lock in a low interest rate on variable-rate loans, says financial aid expert Mark Kantrowitz. Federal consolidation and private refinancing are very different. You might lose the benefit of a flexible payment plan or other payment options such as a deferment.

But in general, here are some of the benefits and potential drawbacks when considering student loan consolidation. Private consolidation is a completely different story, though. Each of them may have different terms, including interest rates. The same is true for forbearance, a period allowing you to temporarily postpone your student loan payments.

The Direct Consolidation Loan allows you to consolidate multiple federal student loans into one. The interest rate on a Direct Consolidation Loan is a fixed interest rate, which means it will remain that way for the duration of the loan. Each semester, you may have taken out a new loan. Depending on your current interest rates and loan amounts, you can actually end up paying higher interest rates and increasing the overall amount you owe.

This will obviously depend on your credit history, the rates on your existing loans, and the interest rates your new lender can offer you. You may end up paying more on your loans than you would have if you did not consolidate them.

Here are four things to consider before you make the leap. Consolidation usually gives you more repayment options, but it can limit them too.

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Consolidation can affect your eligibility for forgiveness. One of the myths of consolidation is that it makes your debt less expensive by lowering your interest rate. You may be required to get your loans into good standing before being able to consolidate them, though. Simply put, this is the process of combining your multiple student loans into a single, bigger loan, possibly with a new lender.

This can include interest rate discounts and principal rebates.