Loan consolidation is a process that allows you to combine multiple student loans under a single lender and loan agreement. Although loan consolidation carries some benefits, such as fewer monthly payments, it also has some disadvantages. To determine whether a loan consolidation is the right choice for you, consider how well you can cope with the disadvantages it may bring.
More Money to Pay Back
Some forms of loan consolidation increase the total cost of loan repayment. Loan providers usually charge interest on borrowed money. The longer it takes you to pay back a loan, the more interest the loan provider collects. If you consolidate all your loans into a single amount and make small loan payments over a longer time frame, you pay more interest as well. This can significantly increase the cost of total loan repayment. To determine the actual amount you might be paying, refer to your consolidated loan agreement and review your interest rate and payback plan.
Potential Loss of Grace Period
Student loan providers usually provide a grace period so students do not have to pay back a loan until several months after graduation. This gives you a chance to find a job before starting payments. However, if you consolidate while still enrolled in school or at the beginning of a grace period, that grace period may be revoked. In that case, you'd need to make payments right away and lose the opportunity to situate yourself financially first.
Loss of Borrower Incentives
Loan providers sometimes provide incentives for repaying the loan according to the schedule. An example of a possible loan repayment incentive is an interest rate reduction if you make your payments on time for three to six months. When you consolidate your loans, these benefits are lost because the loan agreement providing for them is voided to allow for the new, consolidated loan agreement. Any benefits already received must be paid back.
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