5 Reasons Not to Consolidate Your Student Loans
One of the biggest sources of debt in the United States is student loan debt. Americans currently owe more than $1.5 trillion in student loan debt, and these monthly payments can really stretch a household budget.
Many student borrowers owe multiple lenders, and according to Rate Rush, consolidating your student loans can cut down on the number of payments you’ll have to pay. It can also cut down your monthly payment amount and provide you with more free cash flow under some circumstances. However, there are several reasons you might not want to pay off your student loans.
The Possible Loss Of Flexible Terms
Federally subsidized loans will frequently come with the ability to access forbearance or deferral. This allows borrowers who fall on hard times to put off paying down their student loans. Interest will still accrue on the accounts, but the borrower will obtain a little flexibility in the short run. Consolidating these loans will create a new loan with new terms.
The opportunity to put off your payments may disappear, and missed payments can hurt your credit record. Additionally, there are various payment options. Student borrowers can choose to pay off their loans over a fixed 10-year period. Additionally, there are income-based options that can allow you to stretch your payments over a longer period of time. Locking yourself into a consolidation loan can take away these options.
You’ll End Your Grace Period
Most student loans come with a grace period that starts when you leave school or graduate. For most loans, this period is six months. For Perkins loans, it’s nine months. This period should give you some time to find a job and get your finances in order before you have to start paying back your loans.
Interest will accrue on the loan throughout your grace period, but you won’t have to make any payments unless you choose to. If you choose to consolidate your loans, this grace period will end.
You Work In Public Service
Many states and localities offer incentives to entice people to come to work for them. Some school districts fall into this boat. It can be hard to get employees who have high levels of student debt to work in lower-paying public service areas like education. For this reason, some districts will pay some or all of an employee’s student debt if they meet a required period of service.
Additionally, there is legislation that allows for the discharge of some federal student loans for public service workers. Although this can be difficult to achieve, there have been some people who have had most of their loans forgiven.
You’ll Lose The Option To Selectively Pay Loans
If you have several student loans, you can choose to pay down the smallest loans or the ones with higher interest rates more quickly. Many federally subsidized loans come with a low interest rate. Private loans come with higher rates.
Therefore, it can make sense to pay off the loans with the higher rate more quickly. If you decide to consolidate your loans, you’ll have to pay at the going interest rate on all of your student debt. On the other hand, if you’re trying to pay off your loans using a debt snowball, you’ll likely lose momentum and be less motivated to kill your student loan debt quickly.
You’ll Extend Your Payment Period
If you’ve been paying down your loans for several years, you might have a short time period left to pay off your debt. Taking out a consolidation loan might reset the payment terms. It won’t necessarily increase the amount you owe, but it could lengthen the repayment terms. This could leave you in debt for longer than you’d be in debt if you just paid off your loans under the original terms.
There are other reasons you might want to forego consolidating your student loan debt. These include:
- An inability to cut your interest rate
- A longer term could lead to higher overall interest payments
- An inability to consolidate private student loans
Student loan debt is one of the biggest reasons people have trouble hitting important financial milestones. Consolidating them might provide an opportunity to pay them off more quickly, and it can be a tempting option for many people. However, it’s a good idea to take these points into consideration so that you don’t consolidate your loans at an inopportune time.