The Disadvantages of Student Loan Consolidation

Student loan consolidation allows you to combine multiple loans across terms or years into one, easy to manage loan payment. Most borrowers find this option much less stressful than paying off each loan individually, and it can often present a cheaper method to pay off college. Despite these key advantages, there are several disadvantages to be aware of.

What is Third Party Consolidation

To understand the downsides of consolidating, you need a clear picture of the process. Consolidating a loan means taking on a new loan. This loan is large enough to pay off all of your existing student debt. In the future, you will make one payment to the new lender instead of multiple payments to various lenders.  All your previous loans will be closed upon consolidation. 

Consolidation Hurts your Credit

The main issue to research is how the lenders will report the consolidation to the credit bureaus. If you have federal loans, then you may seek federal loan consolidation without a credit penalty. However, in this case, you must consolidate through the federal option. Any type of private loan consolidation will typically result in a bad report on your credit. Many people make the mistake of thinking prepaying loans is good. But, lenders extend loans and terms based on the idea the loan will be paid off according to the contract. Prepaying alters the profit the lender can make on the loan. As such, the lender will actually report that you broke your contract with them instead of saying you paid off your loan in full. 

Prepaying Results in Fees

Aside from simply knocking your credit, your lenders may also charge you a financial penalty for prepaying the loan. This penalty is supposed to be high enough to discourage you from going through with the prepayment. This means the fee may actually make your loan more costly than if you paid it off according to schedule. Some borrowers will still benefit from the consolidation because, even though the total payments amount to a higher sum, the monthly payments are more manageable. Other lenders may prefer consolidating to higher monthly payments if they can pay off the loans earlier and get out of debt faster.

You May Pay More with Consolidation

As mentioned above, it is entirely possible you will pay more over time after consolidating than if you simply paid off the loans according to their current terms. You will need to consider the possible drawbacks of this increased expense. For example, if you invested the extra funds instead of applying them toward the loan, how much profit could you conservatively estimate gaining? This potential reward may be enough to offset the hassle of paying off each loan in full with multiple bills every single month.

The best scenarios for consolidation are: one, you cannot afford your loans at the going schedule; two, you can save money over time through consolidating now. If either of these two scenarios is true, then the benefits to consolidating will always outweigh the disadvantages. If you are consolidating in any other scenario, you will need to seriously weigh the consequences.

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