Consolidating your student loans can be one of the wisest things you can do, a financial strategy that follows the same concept as refinancing your home loan. In other words, you renegotiate the terms of your debt to make it easier to pay off. Most people freshly graduated from university start their careers earning entry-level salaries, which can be tough financially even if they don't owe anything for their education. But tack on $10,000, $20,000 or even $50,000 in student loans, and suddenly you find that there's a whole lot of month left over at the end of the paycheck. Student loan consolidation can help alleviate some of your budgetary stress.
The biggest advantage to consolidating your student loans is that you will now owe your debt to one lender, not several. This makes monthly payments much more convenient and manageable. As well, if your financial circumstances change as a result of a job loss or a major health care bill, it's good to have one point of contact in which to negotiate this aspect of your monthly budget. Also, there is no penalty for paying off a consolidated loan ahead of schedule should you find that you have come into some money.
There are other advantages, too. Consolidated student loans typically have a fixed interest rate, which can save you thousands of dollars during periods when the government raises rates. Even if your consolidated loan has a slightly higher rate than the average of your unconsolidated loans, it can still save you money over the long haul as interest rates climb. Locking in a low rate now could save you a lot of money down the line.
There are other ways that a consolidated student loan can lower your monthly payments. Some lenders will offer to drop the interest rate (sometimes by as much as a quarter of a percentage point) if you agree to automatic withdrawals from your bank account.
While it's typically not a good idea to consolidate your loans during your grace period - it usually means you have to start paying right away - the one advantage of this is that you can lock in an interest as low as 4.75 percent. This would be the way to go if you find good-paying work in your field immediately after graduation.
Despite some disadvantages to student loan consolidation, you can get a lot of benefit from it. Talk to your lenders about what benefits they may be able to offer you to bring all your debt under one roof.