Student loan consolidation allows you to combine multiple federal student loans into one loan so that you make only one payment every month instead of multiple payments. This option offers several benefits to borrowers. Unfortunately, the myths surrounding student loan consolidation cause a lot of confusion resulting in many students making the wrong decision, which can cost them, big time.
Understanding the truth vs myths about student loan consolidation will help you understand your options better and make sound decisions about how to proceed with repaying your student loans.
These are some of the most common myths about student loan consolidation.
Myth 1: Student loan consolidation and student loan refinancing are the same thing
Truth: Consolidation and refinancing your student loans refer to two distinctly different repayment options.
Consolidation refers to combining multiple federal loans into one in order to simplify monthly payments or to get access to forgiveness programs or more favorable repayment plans.
Student loan refinancing refers to applying for a new loan, usually one with a lower rate of interest, in order to repay one or more existing loans.
Consolidation is only applicable to federal loans. Private loans do not offer a consolidation option. The only option available for repaying private loans is student loan refinancing.
Myth 2: You can consolidate your private student loans along with your federal student loans
Truth: It inadvisable to consolidate your student loan (federal and private loans) into one loan.
Federal loan consolidation is a government process and can only be used for federal student loans. When you consolidate your federal loans, the interest rate that you will pay is calculated by taking a weighted average of the interest rates of the loans you are consolidating.
Private loans do not offer a loan consolidation option. When the term consolidation is used for private loans, it in fact refers to student loan refinancing and involves applying for a new loan. In this case, your prospective lenders will make you an offer after assessing your credit history.
Myth 3: Loan Consolidation is all good
Truth: Student loan consolidation may not be the right solution for everyone. You must assess your unique situation and carefully consider if this is the best option for you.
Loan consolidation can simplify loan repayment considerably by merging all your loans to one bill. It may also give you access to alternate repayment plans that you would not have had before, such as switching your variable interest rate to a fixed rate of interest.
Another significant benefit is that it gives you a longer time period in which to repay your loans, which instantly reduces your monthly payments. While this may sound like a good thing, there is a downside that you should be aware of. Increasing the repayment period means you will eventually end up paying more by way of interest.
Should you apply for student loan consolidation? Before applying to get your loan consolidated you must take time to understand exactly how loan consolidation works and compare your current monthly payments to the projected monthly payments if you consolidated your loans.