Congratulations: graduation is around the corner! Now you get to deal with things like your aunt asking what you’re doing with your life, a vague sense of spiritual dread and this pressing question, “Should I consolidate my loans?”
Consolidating your student loans can save you money – in the right circumstances.
And to be honest, any situation that might reduce your loan cost sounds pretty great right now. But you shouldn’t jump in blind. Here are a few things you should consider first.
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Factors to Consider
Fresh college grads are a lot like adult cats. In theory, you can fend for yourself, find yourself food, etc. Reality and theory are not synonyms in the English language.
Same story with student loans.
So when you’re asking yourself, “Should I consolidate my loans?” what you should really be asking is if you’re in a position to qualify to consolidate your loans.
Credit Score and Credit History
Chances are, if you’re fresh out of college, you don’t have a long credit history. Or, you know, any credit history to speak of.
Fun fact: when you tell a lender, “I want to consolidate my loans,” you still need to meet certain credit requirements, despite the fact that you’re a college student without a credit history to speak of.
Many lenders, for example, are keen on a credit score in the high 600s. Some will also want to see a positive repayment history on your loans before they consider debt consolidation as an option.
Do yourself a favor. Check your credit score with the major credit companies before you take the next step to consolidate your loans.
Employment and Income
Moral of the story: read the fine print. And every word of the eligibility requirements.
Most lenders will want to see that you have a job lined up and sufficient income to repay your loans. Some will even include income requirements.
Which is no small asking price for recent college grads, especially because you’re usually leaving college to go to an entry-level job that pays like an entry-level job (translation: peanuts you can maybe live on with four roommates).
So if you’re on the low end of the income spectrum, maybe hold off on loan consolidation.
Loan Grace Period
Also known as the six month period after graduation in which your lender is nice enough to let you get on your feet before they start demanding money.
When asking yourself, “Should I consolidate my loans?” consider this: under some lender’s repayment terms, consolidating your loans might mean switching to a new loan.
One that requires payment as soon as the loan is dispersed, instead of your lovely six month grace period.
There are some companies that honor the grace period so that you can benefit from lower interest rates now instead of later. The key is to read the fine print.
The Difference Between Refinancing and Consolidating
Fun fact: when you’re asking yourself, “Should I consolidate my loans?” you’re not asking whether you should refinance your loans.
Refinancing and consolidating your loans are not actually the same thing.
When it comes to consolidating your loans, you actually have two options available: either take out a Direct Consolidation Loan from the government or refinance your loan through a private lender.
Why does it matter?
Well, it changes your options a bit. Also, you may be qualified for one but not the other.
Since a Direct Consolidation Loan is through the federal government, you can only use it for federal student loans, and you can’t use federal consolidation on a private loan.
Refinancing, on the other hand, is an equal opportunity employer – you can do it with federal or private loans.
The choice between the two will also affect your interest rates (refinancing can lower your interest rate but consolidating your loans won’t) and it changes your repayment term options.
Types of Repayment Plans
When it comes to the question of, “Should I consolidate my loans?” you also need to keep in mind that there are various types of repayment plans available.
There are two main types you need to be aware of.
There’s the traditional repayment plan, which consists of a fixed payment every month until the full amount is repaid.
Or, there are income-driven repayment plans, in which you pay a certain percentage of your income every month based on how much you make for a set time period. At the end of that time period, the full amount is either repaid or not. If it isn’t, the remaining balance is forgiven.
When you consolidate your loans, you’ll be asked to choose a payment plan. If you don’t, you’ll be automatically placed on a standard repayment plan, which may not be what suits your income right now.
Consolidate My Loans: Pros and Cons Checklist
Of course, before you decide, “I’m going to consolidate my loans,” it’s important to keep your pros and cons in mind before you commit to any serious financial activity.
Benefits of Consolidating Loans
First things first. Let’s talk about why you want to consolidate your loans.
It has to do with the fact that you have multiple loans in the interest of making your life easier.
If you’re like most students, you took out a new loan every year, or every semester. Which means you opened a new account every year to take out a new loan, even if it was with the same company.
Consolidating your loans turns all of those loans into one loan. It doesn’t reduce the amount you need to pay, but it makes it possible to make one payment instead of several.
Of course, it can lower the amount you need to pay under certain repayment terms, but that also means you’ll be facing a longer repayment term.
Downsides of Consolidating Loans
But, wait, consolidating loans makes your life easier, right? How can there be downsides to consolidating loans?
Well, for one thing, it can raise your overall interest, since you’re lengthening the repayment term of the loan. And because the term is longer, it could hinder you when it comes time to buy a house, relocate to a new city or invest in new opportunities.
You should also be aware that Direct Loan Consolidation adds one-eighth of 1% to the weighted average interest rate. Basically, your interest gets rounded up.
You can also lose out on some benefits like loan cancellation under certain requirements, or your grace period.
So…Should I Consolidate My Loans?
Well, it’s a question of where you are financially right now.
But it’s also a question of where you want to be (or think you want to be) in the future. Consolidating your loans might make life easier now, but it could also make certain repayment aspects more difficult later.
So you need to do a cost-benefit analysis of whether consolidating now is the best option or whether you’re better off to wait a little longer.
I Decided to Consolidate My Loans! What Now?
Congratulations! You decided to consolidate your loans!
Of course, now that you’ve checked the boxes and decided you’re ready, you need to have your ducks (and paperwork) in order before you go to your lender to consolidate those loans.
Not just because it makes your life easier. It will tell you (and your lender) whether you’re eligible to consolidate your loans, and it will help the whole process move forward a bit more smoothly.
Before you pass Go and consolidate your loans, make sure you’ve done these two things first.
Know Your Credit Score
We’ve said it before and we’ll say it again: you need to know your credit score.
It’s more than just knowing the number, though the number certainly helps. You need to know what your lender’s requirements are for a credit score, and if there’s anything you need to do to help matters before consolidating.
You also need to know if there are any major issues with your credit score that would hinder a lender from allowing you to consolidate your loans. Your repayment history, for example.
Or, if you’re a secondary user on your parents’ credit card, you should know that their credit lines (and repayment) will affect your credit score.
Know Your Lender’s Requirement
It seems glaringly obvious. But if you don’t know your lender’s requirements, you won’t know if you even qualify.
A trustworthy lender will make it easy to find their requirements for consolidating. Typically, they’re interested in looking at your area of study, degree, credit score, employment, salary and payment history to determine eligibility.
It can also depend on where you live and where you’re from. Certain lenders have eligibility requirements that are conditional on U.S. citizenship or residency in certain states. Some lenders won’t even offer consolidation or refinancing in certain states.
So make sure you do your homework on all the refinancing companies before you show up saying, “I want to consolidate my loans.”
How Soon Can I Consolidate My Loans?
Much though it would be nice if the answer was, “I can consolidate my loans right now,” it’s not always that easy.
Let’s get one thing out of the way first. If you’re eligible, have a stable income (emphasis on the word stable) and a good credit score, you should consolidate your loans as soon as you can.
Basically, your goal in consolidating or refinancing loans is to lower your payments per month or help make your interest rate more manageable. In that case, you’re better off doing it as soon as you can qualify to do so because it will save you money for the long haul.
What if I Can’t Consolidate My Loans?
Of course, the answer to, “Can I consolidate my loans?” isn’t always yes.
There’s any number of reasons for this. The most obvious is if you haven’t actually graduated yet – lenders usually aren’t keen on having you consolidate if there’s any chance you may still need student loans in the future.
Alternately, you may not be in good enough standing to qualify to consolidate. Life happens.
Three Options When You Can’t Consolidate
If you can’t consolidate your loans yet, you shouldn’t just give up hope from the get-go. You have several options to help make your loans easier, to work towards consolidating or find other ways to consolidate your loans.
Here are three to keep in mind.
Work Toward Qualifying
This is the most obvious of the three, but it’s obvious because it’s always a good choice.
Let’s say you were rejected (or are likely to be rejected) because of your credit score. Instead of getting discouraged, come up with a feasible plan to improve your credit score over time so that you can qualify in the foreseeable future.
Get a Cosigner
We get it – you want to be independent. But if you really can’t wait to consolidate your loans, then getting a cosigner could be a viable option.
For those who don’t know, a cosigner is someone who signs the loan agreement with you and thus makes themselves equally liable for the debt. It’s like if your parents cosigned on your first college apartment because you couldn’t cover rent on your own.
Much like that first apartment, a cosigner makes it easier to qualify because there’s someone else for the lender to turn to if you’re not in a good paying position. This is an especially good option for recent grads with little (or no) credit score or a low income.
Look Into Income-Driven Repayment Plans
This is more of an option if you have federal student loans. But it’s handy because it changes the payment to something you can actually afford – which is kind of a big deal if income is truly a barrier.
The Best Time to Consolidate My Loans?
When you’re ready.
And we’re ready when you are.
If you need debt consolidation to get your life back under control, we’re here to help make your finances a little more manageable.
Or, if you’re not quite out of the woods yet and still need a student loan, we can help with that too – even if you need a loan but you have bad credit.
And if you need advice, we’ve got your back too. Check out our blog for posts like how to get a student loan with bad credit.