Student loan Consolidation

pros and cons of student loan consolidation

June 22nd, 2007 Subscribe To Our Feed

There can be many pros and cons of student loan consolidation. According to Sallie Mae, which owns or manages student loans for more than 7 million borrowers, the new repayment rate for student Stafford loans will be set on July 1 at 4.06 percent. That’s nearly two percentage points less than it has been for the past year.

The new rate for PLUS loans, which are given to parents, will be 4.86 percent, down from 6.79 percent in the past year. The rates were determined by Tuesday’s Treasury bill auction. (The Department of Education is expected to report the official rates by the end of the week.)

As a result, if you have one of these variable-rate loans, you’ll automatically owe less money for the next year. But you may benefit even more if you consolidate your student loans at the new rates, which will be in effect for a 12-month period through June 30, 2003. (Rates are set every year on July 1.)

The beauty of consolidation is that you lock in one fixed rate that is based on an average of your loans’ current rates. That way you no longer worry about paying more when interest rates climb, which is an inherent risk of variable-rate loans such as the Stafford or PLUS.

Reasons to consolidate

Generally speaking, people consolidate their student loans for one of two reasons: To lower their monthly payments or to save money over time. Each has its pros and cons, and only you can judge what’s best for you.

If you want to significantly lower your monthly payments, you often can do so by extending your repayment period well past the 10-year term typical for federal student loans. Doing so, however, means you will pay more in interest in the long run since you will be making payments over a greater length of time.

In terms of providing immediate payment relief, however, “loan consolidation can be a really good debt management tool,” said Martha Holler, a senior director at Sallie Mae.

If your goal is to save money over the long haul, locking in a low interest rate now without lengthening your repayment period is the way to go. The sooner you pay off your loan, the more you save. You’re even free to pay more than the required monthly amount if you wish. That’s because with consolidated federal loans, “there is no prepayment penalty,” Holler said. One possible drawback to this option: your monthly payments may be the same or even higher than they were before consolidation.

The bottom line here is for the pros and cons of student loan consolidation. In most cases the pros well out way the cons.

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