According to the National Post-secondary Student Aid study, the median level of student debt after graduation is $23,186. Student loan debt consolidation involves putting all bank and federal student loans (Perkins, Stafford and PLUS) together and making a single repayment each month. It is important to understand that credit scoring is necessary to qualify for private student loan consolidation. This means that the applicant will need a good credit rating or a cosigner with excellent credit. The cosigner will be financially responsible should the borrower default on the agreement.
Advantages of Student Loan Debt Consolidation
- Single repayment. Student debt can be combined together which can greatly simplify personal finances. A new account is created for each year that a federal student loan is created.
- Avoid charges. The borrower is far less likely to forget to pay on-time and accrue further charges.
- Student loan repayment term extension. Extending the borrowing term will help to reduce the amount of money that goes towards servicing debt interest each month. This can help to greatly improve affordability and help to prevent money problems.
- Flexibility. Student debt can be repaid when money becomes available.
- Deferment and forbearance. It will still be possible to delay payment for a period of up to three years in the event of unemployment or financial hardship. This will become available even if the borrower has taken advantage of this opportunity on an earlier loan.
Disadvantages of Student Loan Debt Consolidation
- Student loan interest rate. Although private student loan consolidation is cheaper, this won’t be the case for those who have federal student loans, especially if they are subsidized.
- Credit scoring. Borrowing money from a bank will mean that the borrower’s credit rating is checked. This means that those who have a poor credit history (or no credit history) will not be able to consolidate student loan debt.
- Cosigners. Should bad credit be a problem, the only way to borrow money is through a cosigner. However, that person becomes responsible for the debt in the event of default.
- Government assistance. Those with federal student loans may be eligible for debt forgiveness programs should they work in certain public sector careers, such as nursing, the armed forces or teaching. Private student loan consolidation will mean that this opportunity is lost.
- Grace period. A graduate will enjoy a six month grace period after completing their education. Choosing to consolidate student loan debt could lead to this being lost.
Federal Student Loan Vs Private Student Loan Consolidation
Student loan debt consolidation can help to make personal finances more straightforward. Whilst private student loan consolidation could mean a lower rate of interest, this is unlikely to be the case for those who have federal student loans. Whilst extending the term can reduce debt repayments, it will also mean that more cumulative interest is paid over the life of the loan.