Student Loan Consolidation Conundrum
Student loan consolidation is pushed aggressively by many for-profit companies these days. At first glance, consolidation seems like a good idea. Many of these companies, however, may be more focused on the money charged the student loan borrower and not the best interest of the borrower.
Student loan consolidation may be good idea in a few situations. In many instances the negative consequences that flow from consolidation far outweigh any benefit received. Consolidation of students loans, in many situations, is either unnecessary or more harmful in the long run.
The most important thing to keep in mind is that there are many, many factors that influence whether or not to consolidate student loans. Payment convenience, in my opinion, should never be the most important factor.
Some Benefits of Student Loan Consolidation
It’s not possible in a single, short post to address all of the potential benefits of student loan consolidation. Only a few are listed below. And, keep in mind, the benefits noted below may be outweighed by some other negative consequence. So, consolidate with caution.
Convenience: A consolidation loan is a new loan that pays off one or more existing, qualifying federal student loans. Many students graduate with several different student loans that may be serviced by different companies. So, it is true that consolidating multiple loans into one loan may be more convenient for the borrower. Instead of making several different payments to multiple servicers, the borrower can make one payment to one servicer. This factor alone should not be a reason to consolidate if the borrower is otherwise able to pay the student loans.
Curing a Default: Loan consolidation is one of only two ways to cure defaulted student loans. This is certainly a valid reason to consider consolidation. In order to consolidate, however, the borrower must make at least three reasonable and affordable payments or agree to pay the consolidation loan through an income-driven repayment plan.
Qualifying for Forgiveness Program: The Public Service Loan Forgiveness (PSLF) program provides loan forgiveness to those borrowers who have worked for the government or certain non-profit companies and have made 120 (ten years) timely and qualified payments. PSLF, however, only applies to direct federal student loans. So, not all student loans – like FFEL loans – are covered. If otherwise appropriate, it makes sense to consolidate loans not covered by the program with one or more loans that are already covered into a direct consolidation loan. Even this potential benefit needs to be weighed with all other factors. For instance, a borrower may not want to restart the ten-year clock, which is what would occur with the consolidation, if the borrower already made qualifying payments for several years.
Some Pitfalls of Student Loan Consolidation
Again, all of the pitfalls of consolidation cannot be stated in a blog post. Just a few need to be highlighted.
Private Student Loans: A borrower cannot include any private student loans into a federal direct loan consolidation. A borrower should not consolidate federal student loans into a private consolidation loan. If that occurs, the borrower loses all of the repayment options provided by federal law as well as access to forgiveness programs.
Pay More Over Time: A consolidation loan often provides an overall lower payment, mainly because the loan term is extended. Over the longer term borrowers will actually pay more interest over the life of the loan than would have been paid if no loan consolidation is done.
Should Not Consolidate Some Loans: As noted above private loans should not be consolidated with federal loans. Even some loans that “could” be consolidated should not. If a Parent Plus loan is consolidated, the only income-driven repayment plan available is ICR, which may not be a beneficial as the IBR program. Also, Perkins loans normally should not be consolidated because a borrower may lose forgiveness benefits.
If you are considering a student loan consolidation, you need to consider many factors. Sitting down and discussing your options with a student loan lawyer can provide a more clear picture. At Student Loan Support Center we can analyze your individual situation and provide you with your best options. Just give us a call at (239) 362-2755.
