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Consolidating? Things to Consider First

Be smart when combining student loans. 

It’s that time of year when caps and gowns are being packed away and newly minted college graduates have walked across the stage and into the real world here with the rest of us. Many of those students – and their parents and grandparents – will soon start paying off student loans, and will likely be thinking about consolidating some of them to make things a little more manageable. 

Even if you aren’t helping your kids or grandkids pay their loans, they’ll probably be coming to you for advice – right? If the recent grad in your life is paying loans to a number of different lenders, you’re probably thinking to yourself that combining them might be a good option. It can be – but proceed with caution.

Before consolidating any student loans, make sure you know the details of each one. Perhaps the most important thing to keep in mind is that consolidation only applies to federal loans. Private loans will not consolidate. Most students believe that if they consolidate, it’s done, and they only owe one payment each month. Don’t fall into this trap – it could haunt you. I had a friend who’s daughter consolidated her loans, and inadvertently went several months without paying the private loans, as she didn’t realize they weren’t included. This can spell disaster for building a credit score, resulting in higher interest rates and fewer credit options right out of the gate. 

It is worth noting, however, that many private lenders will happily pay off your federal loans to consolidate them into one place. But, you will lose a number of benefits that federal student loans carry, so this option primarily benefits the private lenders. What benefits do these federal loans come with? Depending on the type of loans you and your child took out, or your unique situation or type of work your recent grad is doing, you may qualify for certain loan benefits. These range from principal rebates, loan forgiveness, or flexible payment options. If you consolidate to a private lender, you may lose these benefits, along with facing a higher interest rate, potentially costing you more money down the line.

Overall, consolidation may make sense for some graduates, depending on their loans, income, and budget planning. It is a seemingly easy action, but actually requires a lot of planning and consideration before you act upon it. Creating a budget and knowing the consequences of consolidating is a must. Setting up automatic payments can also allow for easier and less stressful payments as your children or grandchildren learn to budget and live within their means.

Do you know someone who graduated this year, or needs help managing their student loans? Let us know so we can talk to them about options. Also, our On Your Own package from FeeForPlan.com could also be a perfect fit for the young professional in your life. (How about a belated graduation gift?) We are happy to help with any questions, so give us a call or shoot us an email. 

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