Pros & Cons to Loan Consolidation

Student loans are a common financial concern among college students. One specific topic regarding loans is loan consolidation. Essentially, loan consolidation is the act of condensing all loans into one loan with one interest rate. The definition of loan consolidation sounds pretty good but there are always two sides of the story. Take a moment to review both the pros and cons of loan consolidation.

Benefits to Consolidating Loans:

  • Lower interest rate. If you consolidate your loans then you may (but not always) receive a lower interest rate.

  • Changing variable interest rate loan(s) to a fixed-interest loan. All federal loans have a fixed interest rate; however, private loans vary depending on the servicer. Therefore, if you consolidate your federal and private loans together then you will have one fixed-interest loan.

  • Lowering your monthly payments. Consolidating loans may extend the repayment term, which would reduce your monthly payments significantly.

  • One easy payment. Convenient to manage one loan versus multiple loan repayments.  

  • Releasing a co-signer. Check with a bank if you would like to release a co-signer when you consolidate your loans. People may do this once they have become financially stable and no longer need to rely on their co-signer.

Disadvantages of Loan Consolidation:

  • Larger cost over the life of the loan. While consolidation may provide a lower interest rate and monthly payment, it often extends the payment length on the loan; therefore, making the total cost paid more than if a consolidation hadn’t occurred. If you are not having trouble managing your loans, it often makes more economic sense not to consolidate. Be sure to do your research before you consolidate your loans.

  • You may pay an origination fee. Depending on your loan servicer(s), you may be charged an origination fee up to 2 percent for refinancing.

  • Possibility of losing perks from your current lenders. You may lose perks from your current lenders. Those perks may be principal rebates, interest rate discounts and loan forgiveness benefits.

  • Forgo other repayment options. Loan consolidation may forgo other repayment options such as deferments, grace periods and income-based payment plans.

Overall, loan consolidation has its advantages and disadvantages. As a student, you should research all of your options before you jump into consolidating your student loans. To read more, please check out the following link: