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To consolidate or not to consolidate…

For more and more people, student loans are a fact of life. While there’s no magic bullet to wiping them out, loan consolidation can give you access to different payment options.

When you consolidate your federal loans, the government pays off your balances and substitutes them with one consolidation loan.

Consolidation vs. refinance
We should point out that consolidation only applies to federal loans. Refinancing, on the other hand, is a different process. It refers to private loans and occurs when you replace your student loans with a loan offered by a bank or credit union, for example.

Refinancing might be appealing if your new interest rate is lower than what you’re paying now. However, approval is more difficult, as you’ll need to have good credit.

For the purposes of this article, we’ll be discussing consolidation only.

Pros and cons
If you’re thinking about consolidating, here are some important factors to keep in mind.

Reasons to consolidate:

You might be able to access special repayment plans
With certain types of loans, consolidation comes with benefits such as income-driven repayment. This tethers your loan payments to your income, and forgives your federal loan balances after 20 or 25 years.

You may also become eligible for Public Loan Forgiveness. Under this program, the government excuses your loan balance after 120 payments, as long as you work a public service job.

If you have multiple loans with different lenders, consolidating makes your life easier. Plus, keeping track of different lines of credit can be tricky, and increases your risk of missing a payment.

Reasons to keep your loans separate:

Consolidating won’t save you money
When you consolidate your federal loans, the government gives you a new interest rate based on the weighted average of all your loans’ interest rates. In other words, you won’t be paying less interest. In fact…

You’ll probably pay more in interest
Consolidated loans are typically extended over a longer period than other kinds of loans. That means, unless you increase your payments, you’ll be spending more money over the life of the loan.

Want to learn more about paying off your student loans? Talk to a BALANCE Certified Financial Counselor.

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