POST GRADUATION
Pros and Cons of Consolidation
The upsides of a consolidation loan include the following:
- Consolidation replaces the multiple payments on multiple loans with a single payment on the consolidation loan.
- Consolidation provides access to alternate repayment plans, such as extended repayment, graduated repayment, and income contingent repayment. Alternate repayment plans often reduce the size of the monthly payment by as much as 50% by increasing the term of the loan. This can make the monthly payments more affordable and management, but it does increase the total interest paid over the lifetime of the loan.
- Consolidating an 8.5% fixed rate PLUS loan reduces the interest rate by 0.25% because of the lower 8.25% interest rate cap on consolidation loans. To maximize the interest rate reduction, the PLUS loans must be consolidated by themselves.
- Consolidation resets the 3-year clock on certain deferments and forbearances. A consolidation loan is a new loan, with its own fresh set of deferments and forbearances.
- Consolidating your loans allows you to switch from one lender to another. You can also switch from Direct Loans to FFEL and vice versa. If you shop around, you might be able to get a better discount on loan interest rates and better rebates on the fees.
- The interest benefits on a Subsidized Stafford Loan survive consolidation. This means that the federal government continues to pay the interest on the portion of the consolidation loan that resulted from the payoff of a subsidized Stafford loan while the borrower is in school or during other deferment periods.
There are, however, a few downsides with consolidation that you should be aware of when considering a consolidation loan:
- When a borrower consolidates during the grace period, the borrower has to begin repayment immediately and loses the remainder of the grace period, including possibly interest benefits on subsidized loans.
- Alternately, if you cannot begin repaying the consolidation loan because you are still looking for a job, you can apply for an unemployment deferment or an economic hardship deferment. These deferments allow you to delay repaying the loans for up to three years. Interest continues to accrue on unsubsidized loans, and must either be paid or added to principal through capitalization.
- Loss of subsidized interest benefits on Perkins Loans and loss of loan forgiveness provisions.
- Extending the repayment term may increase the total interest paid over the lifetime of the loan.
- Current law allows borrowers to consolidate their loans only once. If you want to include a previous consolidation loan in a new consolidation loan, you must be adding other loans to the consolidation loan.
- Once the interest rate on a consolidation loan is fixed, it does not change.
Source: FinAid.org
