7 reasons not to consolidate your student loans

Thinking about consolidating student loans? Here are a few reasons why you might be better off leaving your student loan payments as-is.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

There are certainly some benefits to student loan consolidation. Most obviously, you'll have only one monthly payment to worry about, and if you have strong credit, you might be able to find a lower interest rate when consolidating or refinancing your student loans.

However, student loan consolidation has its drawbacks as well and isn't a smart move for everybody. Here are 7 reasons why you may be better off leaving your student loans as they are.

1. Repayment options may not be as flexible

If you use a private student lender to consolidate your loans, you'll generally be committing to one repayment schedule for the entire term of the loan. Federal student loan borrowers can choose a standard 10-year repayment plan or an extended term, but also have the ability to take advantage of unique and potentially money-saving options such as the Pay As You Earn plan or other income-driven repayment options.

If you obtain a federal Direct Consolidation Loan, you are still eligible for these alternative repayment plans. However, it's important to note that by consolidating, you'll lose any credit you've already earned toward income-driven repayment plan forgiveness. For example, the Pay As You Earn plan offers forgiveness of any remaining balance after 20 years of on-time payments. So, if you've already made several years' worth of payments under the plan, you'd effectively be starting the clock over.

2. You may lose the ability to get a deferment or forbearance

Private student loan consolidation has become much more prevalent over the past few years. However, it's important to realize that there are some hardship options (deferment and forbearance) that aren't likely to be offered by a private lender. These allow you to postpone payments if you fall on hard times financially, so if you don't have a rock-solid source of income, you may want to think twice before losing this option.

3. You can't selectively repay your loans

When you have several individual student loans, you have the ability to pay down your highest-interest loans faster. As a personal example, I have separate student loans for every semester I was in school. These loans have interest rates ranging from 5.75% to 6.75%. When I want to pay extra toward my student loans, I have the ability to apply the payment toward the higher-rate loans in order to maximize my interest savings. If I were to consolidate my student loans, I would lose this option.

4. You are within your grace period

With most student loans, you have a 6-month grace period after leaving school before you need to start repaying your loans. Consolidation loans have no such window, and generally require repayment starting about 2 months after the loan is approved. In other words, if you just graduated and apply for a consolidation loan, you need to be prepared to start making payments much sooner.

5. You've already been paying your loans for a while

When you consolidate your loans, your loan repayment term starts again, or could get even longer. Many borrowers are attracted to consolidating because it often translates into a lower monthly payment. However, you'll end up paying your loans for a longer period of time, especially if you've already been paying on your loans for some time.

6. You work in public service or you're a teacher

Federal student loans have some pretty generous forgiveness programs if you qualify. Teachers can apply for as much as $17,500 in loan forgiveness after 5 successful years of classroom teaching, and public service employees can apply to have any remaining balance forgiven after 10 years of on-time payments in a qualifying repayment plan.

Private student loans typically don't have any similar forgiveness programs.

Even if you decide to consolidate your loans through a federal direct consolidation loan, it's important to realize that any progress you've made toward public service loan forgiveness (PSLF) will cause the 10-year clock to restart.

7. Your student loans may have a lower interest rate than you can find elsewhere

If you apply for a consolidation loan with a private lender, your new interest rate will be based on factors such as your credit history, repayment term length, and your lender's currently available interest rates. Your federal student loans have a fixed interest rate that is generally on the lower end of the spectrum, so there's a good chance that you won't find a better interest rate through a private lender.

If you use a federal direct consolidation loan, a weighted average of your loans' interest rates will be taken, and then adjusted upward by 0.125%. Although it's a small difference, it's important to be aware that you'll pay slightly more interest by consolidating.

In addition, if you have any accumulated unpaid interest on the loans you're consolidating, it will be added to the principal balance. So, your future interest will be calculated on a larger principal balance than before.

To reiterate, there are certainly some advantages to consolidating or refinancing your student loans. However, if any of these situations discussed here apply to you, you might want to think twice.

Topics:
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print
Article copyright 2018 by The Motley Fool. Reprinted from the December 26, 2018 issue with permission from The Motley Fool.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third-party provider of the reprint permission and Fidelity Investments are independent entities and are not legally affiliated.

Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

872635.1.0
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.
piggy

Get more insights from MyMoney

Just sign up and we'll email our latest thinking every 2 weeks.
Not sure? Learn more
We understand that privacy and security are important to you and will only subscribe you to the MyMoney newsletter. See our Privacy Policy.

Here's what we suggest you explore next

Investing tips: Is it better to go bankless?

When you're just starting out in your investing journey, there are some important things you should know.

Like your checking account, but with some useful extras

All ATM fees reimbursed. No minimum balance. Pay bills. Deposit checks.

You might also like

5 hacks to prevent falling into credit card debt

With some helpful hacks, you can avoid spending too much and prevent credit card debt. Learn more here.

Pay off student loans faster in 2019

Pay off your student loans faster with these strategies to lower debt and live a better life financially. Here are 7 ways to pay off your student loans faster in 2019.

13 ways to prevent credit card fraud

Maybe you've taken steps to avoid identity theft, and even applied a credit freeze to your credit report. Read these tips on how to protect your credit card from fraud.

Like your checking account, but with some award-winning extras

All ATM fees reimbursed. No minimum balance. Pay bills. Deposit checks.