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Disadvantages of Student Loan Consolidation

Students are required to apply for student loans year after year. As such, many students end up having multiple loans upon graduation. This makes it more difficult and time-consuming to manage loan payments. Loan consolidation is one possible solution. But before taking this road, you must understand what loan consolidation is, how it works, and the merits and demerits of student loan consolidation.

What is Loan Consolidation?

Loan consolidation refers to the practice of combining student loans that may be from several lenders into a unified new loan from a single financial institution. While loan consolidation does not reduce your remaining debt, it makes it more manageable to make the monthly payment. Loan consolidation can even be used for a single student loan.

Potential Advantages of Student Loan Consolidation

Loan consolidation simplifies the process of paying your bills. You are required to make a single payment every month to a single lender. You can use loan consolidation to free up some cash by extending the repayment terms of the original loans. The extension in repayment terms lowers the current monthly payment, giving you the freedom to spend cash where it’s most needed.

It is easier to monitor and manage one loan than it is a number of loans. There is only one lender to contact for questions relating to your loan. It also eases the burden on your mind and strategically on the best ways of repaying your debt.

You can choose to consolidate your loan with a lender who offers better loan management options than one or more of your existing lenders. For instance, some lenders offer the simplicity of managing and repaying student loans online. Likewise, you can also reap the benefits of interest rate reduction with some lenders who offer a rebate for making automatic payments from a savings or checking account.

Consolidating allows you to lock a fixed interest rate. If you manage to secure a rate that is lower than the current interest rate of your loan, you may realize a lot of savings over the long term.

Potential Disadvantages of Loan Consolidation

As with any financial policy, there are some potential disadvantages of student loan consolidation.

If you choose to extend the life of loan through consolidation, you will have more money in your pocket, but you’ll be paying a greater amount of interest over the life of the loan.

If you choose to pay the monthly minimum after loan consolidation, you will have to live under the burden of debt for a longer period of life after extension of terms through loan consolidation.

Since you can only take advantage of consolidation once, you will lock your interest rate. You may be able to secure a lower interest rate than your existing rate. However, if in future, the interest rate drops lower than your fixed interest rate, you will not be able to reap any benefit from this reduction.

Consolidation also may mean letting go of flexible repayment terms, such as deferment options, grace period and income-based repayment plans.

Last Updated: July 20, 2016