Consolidation loans are meant to compile all of a person’s loans in one place. This can be a convenient way to pay off student loans by reducing it to one monthly bill. However, it is important to realize that people who choose to do this may pay more interest this way.
Consolidation loans were made popular in part by the Sallie Mae Loan Association. Xonsider that fact that interest rates are usually put on a “fixed” interest schedule. This is opposed to a variable one, even if the original loan was on a variable rate.
If someone started with a variable interest loan that was increasing, this could be a great solution. Consolidation is refinancing. Borrowers are only eligible to apply for this type of loan if they have more than one federal loan.
Should you consolidate?
If you’re trying to decide whether to consolidate student loans, it’s important to remember that consolidation is only possible with federal loans.
If the loan is handed over to the Department of Education, it is, in essence ending up where it started. The Department of Education hands out millions of dollars in federal loan aid each year for students.
Private loans are not eligible for this type of consolidation loans. However, students who borrowed with a private student loan might qualify for that company’s consolidation or refinancing plan. This will depend on the company and how they handle student loans.
Pros and Cons of Student Loan Consolidation
Many people are “on the fence” about whether they should consolidate their student loans. The advantages to this are that it will result in one payment. Only federal loans are eligible and some may not be eligible to be included in the consolidation.
However, there can be one disadvantage to consolidating. It may result in higher interest payments than it did when the loans were considered and being paid back individually. Only consolidate if you want to extend your loan payment out over a more extended time.
Also remember that, when you consolidate payments, you’ll be under a set of new terms. More often than not, consolidation is done by allowing another company to purchase the loans and pay them off. This means the borrower no longer owes the original lender.