That consolidation can be a wise strategy when it comes to debt repayment is a generally accepted truth. However, it’s also true that when it comes to consolidating student loan debt, there are some key considerations to ponder. So, is student loan debt consolidation a good idea?
Well, let’s take a look.
Consolidating Student Loans Vs. Other Types of Debt
There are some major differences between consolidating student loan debt and using consolidation as a form of credit card debt relief for students. The latter has far fewer restrictions and the consequences are entirely different.
Yes, the ultimate goal is the same; to make repaying the debt easier, more convenient and less costly. However, the rules covering those two types of debt are different.
Credit Card Debt Consolidation
The basic mechanisms for consolidating credit card debt are balance transfers, personal loans, home equity loans and lines of credit, as well as debt management. Of the four, the most likely to be approved for the vast majority of students will be balance transfers, personal loans and debt management. In most cases, college students will have yet to acquire a property against which they can leverage a loan.
Of those three, the only one that’s really credit score independent (to a degree) is debt management. This is because you’ll need a strong credit score to get a balance transfer card or a personal loan if your goal is to get a better interest rate.
Debt management is a strategy whereby a credit counselor will take over payment of your debts, using money you provide them with each month, rather than paying your creditors directly. This is basically a de facto consolidation, more so than a formal one. Your accounts will still be paid individually, however you’ll give the money to the counselor to pay them in a consolidated fashion.
Student Loan Debt Consolidation
This is the process of combining multiple student loans into a single one to make repayment easier to accomplish. This can also make the loan payments more affordable each month.
Here’s the thing though, in most cases only federally backed student loans can be consolidated. Private student loans must be refinanced. You’ll have to refi the federal loans into the private ones if you have a mixture of both and you’re trying to unify them.
However, doing so will mean giving up the perks of having a federal student loan. These include the ability to avail yourself of forbearance and deferments if times get tight and you can’t afford to pay. You’ll also forfeit the income-driven repayment options and loan forgiveness programs federal student loans offer.
But is it a Good Idea?
The smart play is to avoid private loans altogether so you don’t have to worry about sacrificing those protections. However, if that’s not an option for you, keep them separate, so you can preserve the perks of the federal loans.
Bear in mind however, that you can only consolidate federal loans one time in most cases, so you must be sure and make it count. Another consideration — consolidating federal student loans — won’t get you an interest rate reduction. The only way to realize a lower payment is to extend the term, which means you’ll ultimately pay more overall.
With these considerations in mind, student loan debt consolidation makes sense only if you can do it for free, you can convert to a fixed interest rate (if your loans have variable rates), and you can get a lower net interest rate. Otherwise, you’ll be better off looking for other ways to make your monthly income go farther.