Remember the discipline you established in college to complete research assignments and study for exams? Be sure to use that same discipline to research the consequences of student loan consolidation before you make a decision.
Consolidation is being offered both by the federal government and private loan consolidators. It sounds convenient: you need to make fewer payments and keep track of fewer loans.
But be careful. Your decision to consolidate may have unintended consequences.
There are at least 5 potential snags that can result from student loan consolidation.
1. You could lose federal protections. Federal student loans include valuable protections and benefits, including the following:
Deferment and forbearance options.
Multiple repayment options, some of which can reduce your monthly payment to $0.
Multiple forgiveness options.
Ways to rehabilitate defaulted loans.
Cancellation benefits if you die or become totally disabled.
But if you consolidate your federal student loans into a private loan offered by a private loan consolidator, you will lose these protections and benefits.
2. You could lose attractive forgiveness opportunities. Perkins loans are a particular type of federal loan offered through colleges. They offer special forgiveness opportunities. For example, 100% of the loan may be forgiven if you have an occupation such as these:
Law enforcement or corrections officer.
Nurse or medical technician.
Librarian or speech pathologist at a school.
Attorney at a public defender's office
Staff member of a prekindergarten or child care program.
Teacher of math, science, foreign language, or special education.
However, you will lose this forgiveness opportunity if you consolidate your Perkins loans.
3. You could become ineligible for some repayment plans. Federal loans offer multiple repayment options. Some of the options are called income-driven plans, because your monthly payment is set based on your household income and family size. Two popular income-driven plans are Income-Based Repayment (IBR) and Pay As You Earn (PAYE). With IBR and PAYE, your monthly payment won't exceed 10-15% of your discretionary income.
But if you have Parent PLUS loans and consolidate them with other federal loans, you will become ineligible for IBR and PAYE.
4. You could restart the clock on Public Service Loan Forgiveness (PSLF). The federal government offers several loan forgiveness programs, including PSLF. PSLF is an attractive opportunity for people working for a wide variety of public service organizations, such as nonprofits, government agencies (federal, state, or local), hospitals, schools, police/fire stations, correctional facilities, and others. Your remaining loan balance may be forgiven if you work for one of these organizations for 10 years. There are a couple of stipulations, however:
The loans must be direct loans, which is the latest loan origination method for federal student loans.
You must make qualifying on-time payments through one of several repayment plans.
If your loans aren't direct loans, you should consolidate them into a direct loan in order to qualify for the program.
But if you already have direct loans and make qualifying payments toward PSLF, you should not consolidate them. Consolidation will wipe out those qualifying payments and restart the clock on PSLF. In other words, you will need to make 10 more years of qualifying payments on the new consolidation loan!
5. Your interest rate will remain the same. Some people think that consolidating student loans is like refinancing a mortgage or auto loan. When you refinance, you convert an existing loan with a higher interest rate into a new loan with a lower interest rate, thereby reducing your interest payments.
Federal loan consolidation doesn't work like that. When you consolidate, your new interest rate is simply the weighted average of the interest rates on your old loans. This is true even if the current interest rate on new federal student loans is lower than the rates on your loans.
Consolidation is a complicated topic, but I hope this overview can help you avoid the most common unintended consequences.