Is School Loan Consolidation Right for You?

Loaded with debt from your school loans? Scrambling every month to stay on top of a mountain of bills? Then, school loan consolidation might be your best bet.

However, just as with any financial strategy, there are potential advantages and disadvantages that should be weighed carefully before heading down this road.

Student Loan Consolidation: Potential Advantages

Fewer bills to manage: Combining your education loans through consolidation can help streamline your monthly finances by exchanging multiple bills with multiple due dates for one monthly payment.
Lower monthly payments: Just like refinancing one's home or car, consolidating school loans can result in lower monthly payments by extending the term of the loan. Depending on the amount of the consolidation loan, the loan repayment period can be extended from 12 to 30 years versus the standard 10-year repayment period. Additionally, alternative repayment plans for consolidation loans are available. For example, one could take advantage of an income sensitive repayment plan, in which the monthly payment is based on the borrower's income in relation to the total federal loan amount that is owed.
Reduced interest rate on some PLUS loans: Parents who have 8.5 percent fixed-rate PLUS loans could reduce their interest rate through consolidation because consolidation loans offer a capped interest rate of 8.25 percent.
Fixed interest rate: Interest rates for federal Stafford and PLUS loans vary each year. However, you can lock in a fixed interest rate by consolidating these loans.

Student Loan Consolidation: Potential Disadvantages

Higher total accrued interest: While consolidating student loans can result in much lower and more manageable monthly payments, you might end up paying more total interest in the long run depending on the length of the new loan's terms.
Loss of benefits for Perkins Loans: If a borrower consolidates his or her federal Perkins Loan, several of the loan's benefits will be lost. For one, if a federal loan is in a deferment period, the government will pay the interest on the loan during that time. For Subsidized Stafford Loans, the government will continue to pay this interest during deferment even after consolidation. However, this interest benefit does not survive consolidation for Perkins Loans. Additionally, borrowers who consolidate their Perkins Loans would lose that loan's favorable loan forgiveness provisions.
Loss of grace period: Upon leaving school, students typically have a six-month grace period during which they do not need to begin paying on their student loans. However, if one consolidates his or her education loans during this window, the grace period is lost.
Only one chance to consolidate: When considering consolidating your student loans, it is important to keep in mind that you have only one opportunity for consolidation. Once a consolidation loan has been granted, the only way to reconsolidate the loan is by adding other loans to the consolidation loan. For this reason, it is extremely important that you do as much research as possible and obtain information from as many lenders as possible before deciding on a consolidation loan.