Disadvantages of Consolidating Your Student Loans

Sometimes it is actually better to rob Peter to pay Paul

Go on any website or blog about student loan repayment and the consensus will probably be that consolidating your student loans is a good idea. The advantages can include easier payment plans, a lower interest rate and, in the end, a better credit rating for you. But don't be fooled into thinking that consolidation is for everyone. There are some serious disadvantages to putting all of your student debt under one roof, and here are a few of them:

It's harder to beef up payments as you go along. Let's say you have student loans of various sizes from four different lenders. Once you pay off one of them, you can then funnel the monthly payment for that loan onto the other loans, thus paying off the (unconsolidated) total faster. This is exactly what I did: When I paid off my line of credit, it freed up $100 a month, which I was then able to channel onto my federal student loan. Then, paying my federal loan off freed up an additional $125 a month, which I could then channel onto my two other student loans.

It's not that you can't make additional payments on a consolidated loan, but to do so means finding extra wiggle room in your monthly budget. Unless you get very regular raises at work, this may not be possible. Paying off your student one chunk at a time creates wiggle room to make additional payments - provided you're disciplined enough to use the extra money for that purpose. Unless you're able to secure an extremely low interest rate for a consolidated loan, paying off each loan in succession may save you money in the long run.

Once you consolidate your student debt, you can't unconsolidated it. Having a consolidated loan can really hamstring you should you decide to go back for more education or if your government introduces new policies that positively affect students in debt. Consolidated loans are almost always with a private lender, so if you decide to go back to school you will most likely have to keep making payments even after you've resumed life as a student. Student-friendly governments (yes, they do come along every now and then) may offer artificially deflated interest rates on federal loans, which you would miss out on if you had a private consolidated loan.

Also, there are instances when you can have your federal loans forgiven altogether, which include working for the military or the Peace Corps. These options would not be available to you if you had a privately consolidated student loan.

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