Pros and Cons of Student Loan Consolidation
In addition to one convenient, fixed monthly payment, a Direct Consolidation Loan also offers some debt-reducing benefits. These benefits include consolidation loans with no determined minimum or maximum amounts, no consolidation fees, and anything but a one-size-fits-all payment structure. Consolidating loans may also give you additional deferment options. A Direct Consolidation Loan allows you to keep your subsidy benefits on any subsidized loan debts you include in your consolidation, and borrowers with older (pre-2006), variable-interest education loans are eligible for fixed interest rates. (A variable interest rate may look good at first, but it has the potential to skyrocket during your repayment period, whereas fixed-rate loans have the same interest rate through the life of the loan.)
Consolidation comes with its benefits, but it also has its disadvantages.
Let's first talk about how extending your payment plan may lower your monthly payments but hurt you in the long run. Any time you take more time to pay off a loan, you end up paying more in the end. Why? Because while you may not be signing any additional loan documents, interest continues to accrue on your debt, and the more time it takes you to pay the more interest you'll end up paying. This also means that if you're close to your payoff date, at least within a year or two, consolidation may be a waste of time and money.
Also keep in mind that when you consolidate your student loans, you may lose some or all of the benefits you may have had with your original loans. What kind of benefits? Your current loans may have perks such as interest rate discounts, principal reduction discounts, or fee rebates among other money-saving benefits. Once you consolidate your loans, the old loans are paid off and accounts are closed; you're left with a single Direct Consolidation Loan.