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Should I consolidate my student loan debt?

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Should I consolidate my student loan debt?

Entering repayment for your student loans is overwhelming enough. But if you took out loans each year, you may be surprised to find that you have multiple student loan balances with different servicers. Keeping track of what amount is due at what point in the month can be stressful.

A possible solution to the problem of multiple payments is a Direct Consolidation Loan. However, consolidation is not right for everyone, and not all loans are eligible. There are numerous factors to consider when deciding if you want to consolidate your student loans.

Your consolidation loan pays off your existing loan

A consolidation loan works by paying off the accounts that are being consolidated and issuing a single new loan to take their place. As a result, consolidation reduces the number of payments you must make each month. Depending on how many loans you have to keep track of, this can make your life a lot easier.

However, since your consolidation loan pays off your existing loans, you will lose any benefits associated with the original loans. Borrower benefits may vary by the type of loan but can include student loan discounts, principal rebates or loan cancellation benefits. Make sure you understand what you're giving up.

Your consolidation loan may extend your repayment period

A consolidation loan may also extend your repayment period. As a result, it is likely that the monthly payment on your consolidated loan will be less than the sum of the monthly payments you were making previously. Since student loan payments affect your credit score, it is important to pay on time and in full each month. If you are having difficulty affording your monthly payments, consolidation might create some breathing room in your budget.

It's important to realize that extending your repayment period means that you will pay more in interest over the life of your loan. Additionally, you may be saddled with loan payments for up to 30 years, instead of the standard 10. If you are able to pay off your loans under the standard repayment plan, you'll not only save money but get out of debt sooner.

There's another factor to consider as well. The largest chunk of your FICO score is attributed to your payment history (35 percent). However, the second largest chunk is based on the amount owed (30 percent). Having a balance for a longer period of time may negate the benefits you reap by making payments on time. Getting your truly free credit score at the beginning of the process may help you determine whether or not consolidation is right for you.

Other consolidation considerations

While most federal student loans are eligible for consolidation under the Direct Consolidation programs, private student loans are not. Some private lenders offer their own consolidation packages, and the interest rate you receive may depend on your creditworthiness. Just another reason to get your free credit score!

An important last note: even if you are able to, you should never consolidate federal loans with a private lender. The benefits and protections offered by federal loans (consolidated or not) almost always make them a better deal than private loans.