More than 40 million Americans have student loan debt. On average, 2015 graduates left their campus with more than $35,000 in debt that they are responsible for paying back. More students are taking multiple loans to help cover expenses. If you have the ability to make a lump-sum payment or consolidate these loans, you may want to look at your options. Before you jump on board, it’s important to look at the bigger picture to see if it’s the right financial move for you. Read on for the pros and cons of consolidating your loans.
Fewer Payments Each Month
Pro: Simpler repayment. Consolidating student loans means fewer lenders and fewer deadlines to keep up with. Dealing with one lender and one lump sum of debt can simplify the repayment process. Even if you have several federal and several private student loans, you can consolidate that down to two lenders and two monthly payments.
Con: Potential to lose lender benefits. Before you consolidate your student loans, inquire about lender benefits so you do not lose any from the previous loans by merging them. Some lenders offer an interest-rate deduction if you automate payments or consistently pay on time, and you probably don’t want these advantages to disappear (unless the interest rate is that much lower on your new loan).
The Amount of Interest You’ll Pay
Pro: Your rates may be lower (or at least not higher). Though nearly all borrowed money comes with interest, part of the appeal of refinancing is that you can save money by paying a lower interest rate on average for all your loans. It’s a good idea to ensure that your new, consolidated loan features lower interest rates than your current loan. Your credit score will play a major role in determining whether a consolidation loan is right for you. You can check two of your credit scores for free on Credit.com to see where you stand.
Con: You might pay more in the long run if you extend your term. Once you lock in a rate, it is very difficult to change course. While you are evaluating the cost of your interest loan on a monthly basis, make sure you check what the overall cost of the loan will be in the long run. But it can be worth it. Consolidating student loans can mean you find a plan to better fit your needs. In addition to interest, you should take this time to evaluate the length of your loan. A lower interest rate over 5 or 10 extra years can add up to more total interest paid over the life of the loan than you would have paid had you stuck with your higher-interest, but shorter-term loan. Make sure you’re you are considering your budget for all your needs and goals.
If You Are Able to Pay It All Off, Should You?
Pushing the limits of your budget to get rid of your student loans forever can leave the rest of your finances in disarray. It’s important to think carefully before erasing your student loan debt and losing the financial flexibility to use that money elsewhere. For example, it’s a good idea to have an emergency fund in place in case an unexpected expense comes up. If you haven’t built one yet, you may want to prioritize that goal over getting debt-free.
Pro: You’ll be free of those student loans forever. Woohoo! Extra money in your budget and extra freedom for allocating it to other goals — buying a home, getting a new set of wheels, saving for retirement, etc.
Con: The interest you pay on your student loans can generally be written off at tax time. While you can only be taxed up to a certain amount, it can lead to serious savings. Lumping your payments into one sum won’t affect your ability to claim the tax deductions. Just keep in mind that paying your student loans faster means you will have one less deduction moving forward (of course you’ll be paying less in interest, too).
It’s a good idea to look at your current budget as well as your current and future financial goals before taking drastic steps to pay down your student loans. Make sure you are making payments in a smart, manageable way — whether that’s early or right on time.
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