What Are the Disadvantages of Student Loan Consolidation?

Many students consolidate their loans to access alternate payment plans and enjoy single monthly payments. Consolidating your student loans involves combining student loans from a range of different loan providers into a single loan from one financial institution.

While student loan consolidation has its perks, you should also be aware of the disadvantages before you change your student loan structure. In many cases, you’ll lose some of the flexibility you currently enjoy or end up paying more over your student loan’s term.

You Can Lose Borrower’s Benefits

Some of the borrower’s benefits you might currently enjoy include a discounted interest rate, a pay-on-time discount, and special rebates. Some loans, especially PLUS loans, also have flexible payment terms like deferment options and grace periods.

These benefits could be lost if you consolidate your student loans. Without them, you could end up paying more in the long run or struggle to make your repayments.

Your Interest Rate Could Be Greater

Losing an interest rate discount isn’t the only time your interest repayments could increase after consolidating your student loan. With several different student loans, you have several different interest rates. Some of these might be very favorable.

When you consolidate your student loans, you’ll have a new interest rate. Since you can only consolidate your student loans once, your new interest rate is locked in, even if interest rates fall.

Your new interest rate may be higher than the interest rates your current student loans charge if the economy is strong. Interest rates tend to fall when the economy is weak or in recession, and it’s likely they will at some point during the term of your consolidated student loan.

Your interest rate could increase even further if you don’t make your payments on time, so being diligent with your repayments is extra important if you decide to consolidate.

You Could Pay More in the Long Run

While interest rate changes and a loss of benefits can increase your payments, there’s another common way consolidating your student loan can end up costing you more. Often loan service providers encourage students to extend their repayment terms.

Extending your repayment terms might sound great at first because you’ll have lower repayments since you’ve got more time to repay your loan. However, experts say this can cost you tens of thousands of dollars in extra interest if you only make the minimum monthly repayments. The longer your student loan extension, the more interest you’ll pay.

You’ll also end up paying for college for a much longer period after extending your student loan. Living with debt is never fun, but you might not realize it could also hinder you in your life after college. If you’re still paying back your student loan, you might struggle to buy a home, start your own business, move to another city, or even buy a new car.

While there are some real benefits to consolidating your student loan, there are also downsides to consider. Weigh up the pros and cons to decide whether student loan consolidation is the best thing for you.

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