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There are times when consolidating student loans can be particularly confusing as it is for a lot of graduates. There are a lot of myths and misconceptions floating around, which just adds to the complexity surrounding consolidation. Is consolidation a good idea? Will it reduce your debt? Before you decide to apply for student loan consolidation, we need to debunk some myths and set the record straight.
Table of Contents
Sr#
Headings
1
Introduction
2
Understanding Student Loan Consolidation
3
Consolidation Myth #1: Student Loan Consolidation Will Lower Your Interest Rate
4
Myth #2: You Will Be Able to Eliminate Some of Your Debt with Consolidation
5
Myth No. 3: Consolidation = Refinancing
6
MYTH #4: ONLY FEDERAL LOANS CAN BE CONSOLIDATED
7
Myth 5: Consolidating Your Student Loans Will Hurt Your Credit
8
Myth #6: After consolidation, you can’t change your repayment plan.
9
Private Lenders Can Consolidate Federal Loans Myth #7
10
Who stands to benefit from Student Loan consolidation?
11
Student Loan Consolidation: Pros and Cons
12
Student Loan Consolidation in 3 Simple Steps
13
Conclusion
14
FAQs
So What Exactly Student Loan Consolidation?
Student loan consolidation combines multiple federal student loans into a single one. Consolidation, rather than you having to manage multiple payments from disparate lenders and paywalls with different interest rates due all at the same time, consolidates them into one single loan payable on a fixed-interest rate. Before leaping in, however, it is vital to keep in mind that consolidation does not reduce your debt or decrease the interest rate. It is just that, a convenience for your payments.
Debunking Student Loan Consolidation Myths Myth 1: Interest Rate Is Reduced
Valuing Your Time — While yes, time is money and interest does add up in that way… many borrowers feel as though consolidating loans will all the sudden grant a lower rate. Regrettably, that is not the case. For a consolidated loan, the interest rate is your current loans weighted averages — rounded up to the nearest one-eighth of 1%. Take into account that this will make your new price almost identical to the existing one, but not cheaper.
It is akin to mixing together random smoothies. Mix a strawberry smoothie with a chocolate one, you get something new. Still, it does not alter the basic ingredients; simply mixes them.
Myth #2: Consolidation wipes out part of your debt.
The latter is a misinterpretation of the clear term, Consolidate and NOT Forgive or Reduce. Ansari says that though it would be nice to have your student loans just disappear, consolidation won’t erase or decrease the amount you owe overall. This makes your payments easier — remember they are still there, you continue to owe all the money in another place instead of different ones.
Myth #3: Consolidation and Refinancing Are Interchangeable
Consolidation and refinancing are closely related terms, but they are not the same. Consolidation is just for federal student loans, while refinancing involves both private and federal. If you refinance, it is like hitting reset on your loans; and you will take out a new loan (many times from a private lender) that pays off the old one. While you may get a lower interest rate through refinancing, consolidation doesnt usually provide this.
Consolidate Only Federal Loans (Myth #4)
This is a half-truth. When you consolidate federal student loans, the only type of loan that would be included is a Direct Loan or FFEL Program (Stafford and PLUS) loan. Private lenders, however, do offer a variety of consolidation options that can merge both your federal and private loans into one new private loan. The catch? Consolidating your federal loans with a private lender results in the loss of these protections around income-driven repayment plans, Public Service Loan Forgiveness (PSLF), and others.
The Fifth Myth- Student Loan Consolidation Is Bad For Your Credit
Dealing with immense financial decisions can be quite worrisome, especially when it comes to how they will affect your credit score. However, consolidating your federal student loans will not damage your credit. In truth, it could also benefit your credit score overall since it simplifies management of payments. Having to make less late payments and having your consolidated loan be current signals good behavior of credit.
Consolidation Myth #6: You can’t change your repayment plan once you consolidate.
One common misconception of consolidation is that once borrowers consolidate their loans, they are automatically set at the same repayment schedule. That’s not true. Through consolidation, you will be able to select one of the many different repayment plans that accommodate your income and capabilities. My plan offers more federals loan repayment options, including standard babylon retracement and income-driven resettlement. That way, if your financial situation changes, you may be able to switch into a less compromised plan.
Fact: Private Lenders Cannot Consolidate Federal Loans
While private lenders can hep with your student loans refinance, they are limited to what services they offer when it comes do federal loan consolidation. Federal loans can only be consolidated by the Department of Education. When you refinance with a private lender, it replaces your federal loans with an entirely new loan (you can also do this at any point before the 20 or 25 years depending on what payment plan youre enrolled in), and potentially means forgoing benefits associated with federal loans.
Who May Need Student Loan Consolidation?
That does not imply that consolidation is for everyone. If you find yourself juggling several federal loan payments, or just want to streamline things in your financial life then it could be helpful. But consolidation might not be the best option for you if your loans are almost paid off, or forgiven under a program like PSLF.
Consolidating Student Loans – The Good and Bad
Pros:
Consolidated Payment: You will have one payment to make monthly instead of multiple(patterns) which can help you keep track over your finances
Interest Rate Fixed for Life: Your new money will be at a fixed rate, with the change in variables allowing you to know where rates are headed.
Expanded Repayment Terms: Consolidation can lengthen your repayment period, reducing the amount you have to pay each month.
Cons:
Zero Interest Savings: There is no interest savings, so if you take a much longer repayment term for your auto loan then over time you may end up paying even more because the lower monthly payments will also keep adding on additional charges of slow payments.
This includes lost of Benefits like being able to defer your repayment, and have forbearance on your loan as well as access to federal forgiveness programs if you consolidate federal loans into a private one.
Applying for Student Loan Consolidation
The process for student loan consolidation is simple, you can apply here in minutes.
Prepare Information: Have all your loan information — how much you owe and the interest rates of each.
How to apply: You can complete an online application on the Federal Student Aid website. There is no charge for this service, so don’t pay a company to do it.
Select a Repayment Plan: When you apply, there are choices of the type of repayment. How much do you earn presently and what is your financial situation like?
When you have completed the above steps then submit your application online. Keep in mind that it usually takes a few weeks for your consolidation to go through.
Conclusion
In some cases, student loan consolidation might be helpful to streamline your payments and ease the burden of managing multiple loans. Consolidation, as it turns out, is not a cure-all. It is not going to make your debt disappear or cut down on those interest rates, but it can reduce a lot of the hassle in dealing with federal loans. Help you for making and informed decision on consolidation, but not to myth bust it.
FAQs
1. Can I combine my federal and private student loans?
Federal loans cannot be consolidated with private ones, except to use a lender of your choice that issues student loan refinancing on federal education debt as well.
2. Does consolidating student loans lower monthly payments?
While consolodation could decrease your payment by stretching out the repayment term, it does not lower what you owe overall.
3. Does student loan consolidation cost anything?
The good news is, it costs nothing to consolidate federal loans through the Department of Education. Watch out for firms that charge you fees to do this.
4. If I consolidate my loans, can I still apply for Public Service Loan Forgiveness?
Well, if you consolidate make sure it’s with only federal loans that are eligible. Student loan discharge for private loans is therefore not going to be equal obligation negation.
5. What about income-driven repayment plans if I consolidate my student loans?
Consolidating loans with FedLoan, SN1 or Navient will NOT prevent you from using income-driven repayment while working towards loan forgiveness.