Student Loan Consolidation: The Good and the Ugly
As most of us know, student loan consolidation is just one way out of the many
to handle student loan debt. Student loan consolidation has its advantages and
disadvantages. Knowing both the possible ups and downs of consolidating your
student loans can be very helpful in determining if a student consolidation loan
is the right choice. Interestingly, each aspect of student loan consolidation
can be viewed as either an advantage or disadvantage depending on how you look
at it.
Perhaps the most apparent advantage of a consolidation loan in the eyes of a
student with debt is the potential to minimize many payments into one. What was
once two, three, four, or more student loan payments each month turns into one
manageable low payment. From a financial management standpoint, this is much
simpler. Also, extending the payment term can serve as a major advantage or
disadvantage. Yeah, sure, extending the payment term will decrease the monthly
payment, however students do not consider the unappealing idea of paying off
student loans when they are grown up and have kids of their own. Extending the
payment term, believe it or not, can have this effect. More importantly,
lowering the monthly payment will result in payments that are covering mostly
interest rather than the principal.
Another advantage regarding student consolidation loans is the interest rate.
When a person chooses to consolidate his or her student loans, they are now
paying a fixed rate of interest compared to a variable rate that stands the
chance of rising from time to time. The fixed rate of interest is determined by
the weighted average of the original student loan amounts and interest rates.
However, it is important to consider your interest rates more carefully if you
have a Federal Perkins Student Loan. The Perkins Loan is meant for both eligible
graduate and undergraduate students, and it has a fixed interest rate of five
percent.
Choosing to consolidate your student loans has other advantages as well. There
are typically no prepayment penalties for a consolidated student loan. So, how
can this be considered an advantage? Well, this allows the student or borrower
to make larger payments earlier on. In return, the larger payments will pay off
the principal rather than just the interest. Unfortunately, many students that
choose student loan consolidation are not able to afford large monthly payments
due to various financial constraints such as living expenses, auto loans, and
others. A potential disadvantage is the loss of some deferment options when
choosing to consolidate your student loans. Upon setting up a consolidated
student loan, some deferment options that are extremely beneficial may be lost.
It is important to be aware of these options and whether or not it is worth it.
Consider all of the pros and cons associated with consolidated student loans
before you choose to handle your student debt. Knowledge is the key to
understanding exactly what is best for you in your particular situation.