Student Loans

Can You Consolidate Student Loan Twice

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 10 minute read

Consolidating your federal student loans can help you save time and money by eliminating the need to make payments to several loan servicers each month.

The vast majority of recent college graduates have some kind of student loan debt, and those that do typically have numerous loans and, consequently, many monthly obligations to pay. It may be stressful to attempt to juggle so many commitments if you lose sight of who you owe something to and when.

If you have multiple student loans, consolidating them into one monthly payment simplifies payments. While this does make it simpler to make payments, it’s not always the greatest choice. There are times when it makes sense to take out a new loan to pay off all of your previous student loans.

What Is the Meaning of Student Loan Consolidation?

When you consolidate your student loans, you take out a new loan to pay down all of your existing debts. One single federal direct loan in the complete amount of your existing debts is issued to you by the government.

The old debts are paid off by the new consolidation loan, and you have one simple monthly payment to make. The business that handles your repayment on behalf of the federal government will now be the only recipient of your monthly payment (your lender).

The only real change is that you now have fewer loans to keep track of. The amount you owe has not changed. Additionally, the new interest rate is similar to the average of your previous loan rates.

On the other hand, the federal government offers many repayment programs, some of which allow you to spread out your payments over 30 years. But if you keep making payments according to the normal 10-year payback schedule, you won’t alter your situation too much.

When Should You Consolidate Your Student Loans?

The Direct Consolidation Loan Program was established with the intention of making loan payments less complicated. It also enables several student debt repayment schemes that were previously unavailable.

Consolidating your student loans may be a good option if you want to simplify your financial life by having to pay just one bill each month, if you want to decrease your monthly payment, or if you want to qualify for a more forgiving repayment plan based on your income.

Not everyone should do it. Consolidating federal student loans isn’t always the best option, but there are times when it makes sense to do so.

  1. You Would Like to Make One Monthly Payment

Consolidating student debts is common so that borrowers just have to make one monthly payment to one lender. That’s why debt consolidation is often the best option for consumers, regardless of their financial standing.

When you owe money to more than one lender, you have to keep track of several bills with varying amounts and due dates. It might cause borrowers to miss payments and get confused about their outstanding balances. By consolidating your monthly bills into one, you may reduce the number of bills you need to keep track of.

  1. You desire lower monthly payments.

Consolidating your student loans might help if you’re having trouble making your monthly payments. You can reduce your monthly payment on your student loans by choosing a repayment plan that allows you to prolong the payback period. Some examples of these are income-based repayment plans, extended repayment plans, and graded repayment plans (IDR).

Please note that the duration of the terms and the associated obligations vary between the options. When it comes to paying off student loans, the length of time it takes is contingent upon the plan chosen. You may be able to get more time to pay back a larger loan through certain programs.

But keep in mind that this will almost always result in a higher total cost of your student loans. You shouldn’t expect a reduction in your interest rate. It does not change during the course of the loan. Additionally, the interest you pay accumulates much faster when spread out over a longer time frame.

  1. You Wish to Be Eligible for Income-Driven Repayment

The Public Service Debt Forgiveness (PSLF) Program is one such student loan forgiveness initiative that is only available to borrowers enrolled in an Income-Driven Repayment (IDR) plan.

Borrowers who qualify for PSLF and make payments under an IDR plan while employed full-time by a government or nonprofit organization are eligible to have their remaining loan total forgiven after just 10 years of making those payments. To put it another way, that’s the same as the typical payment schedule.

Loans that are not a part of a direct consolidation loan from the federal government do not qualify for IDR plans, but all federal direct subsidized and unsubsidized loans do. Federal Perkins Loans, Stafford Loans (both subsidized and unsubsidized), PLUS Loans (for graduate and professional students), etc.

Consolidating your direct loans with your other loans will reset the forbearance clock if you’ve previously made qualifying payments toward forbearance. In other words, any payments you’ve previously made won’t count.

  1. You are in default mode.

If you have a federal student loan and have not made a payment in 270 days, that’s almost nine months. Failing to make a payment on a federal Perkins loan might result in instant default.

When a borrower enters default, federal loan repayment plans are no longer an option and the loan balance becomes immediately due and payable. Any accrued interest and collection costs are also due from you.

To make matters even worse, the federal government can use unprecedented powers to collect on the amount owing, including withholding money from your paycheck, seizing tax returns, and even taking your Social Security benefits. This is all possible without even filing a lawsuit against you.

It is possible to get out of default in one of three ways: paying down the entire sum, completing the student loan rehabilitation procedure, or consolidating your loans. 

Consolidation is the quickest way out of default if the outstanding debt cannot be paid in full. You will need to make three on-time monthly payments and agree to an IDR repayment plan before you can be considered.

If you’re in a time crunch and need to avoid default, this is the best option. A default line will still appear on your credit record even after consolidation. For this, you’ll need the help of a student loan rehabilitation program.

You must make 9 consecutive monthly loan payments within 10 months to get your debts rehabilitated. At least 15 percent of your disposable income is needed for payments. Your discretionary income is the sum that results after subtracting the percentage of the federal poverty line that applies to a family of your size and location from your adjusted gross income from your tax return. Repayment arrangements might vary, but the average APR is 150%.

Make sure you can afford the payments before deciding to rehabilitate your loans, as you will only be able to do so once.

When You Shouldn’t Consolidate Your Student Loans

Consolidating student loans may help you save time and money, but it’s not always the best option. If you combine your debts, you may no longer be eligible for some perks, and after you’ve completed the process, it can’t be undone.

In a fortunate turn of events, you won’t need to combine all of your debts into one single loan. If there are any debts for which you would rather not give up the advantages you now enjoy as a borrower, you are under no need to consolidate them.

  1. You’ve Got a Perkins Loan

Graduate and undergraduate students with exceptional financial need might qualify for low-interest Perkins loans. After September 30, 2017, the federal government no longer offers the Perkins loan program.

However, if you currently have a Perkins loan, you should know that your repayment options will be substantially different from those of other federal student loans. The school that issued the Perkins loan or your loan servicer can provide information regarding repayment choices.

The potential to get Perkins loans forgiven in return for working in specific high-need professions is a distinctive feature of these loans. However, if your Perkins loan is consolidated with other loans, you will no longer be eligible for the cancellation program. 

This is due to the fact that a consolidated loan is not a Perkins loan. You qualify for a direct loan from the federal government.

  1. You’ve Been Using an IDR Plan

With the exception of income-based repayment, which applies to both federal and state Stafford loans, IDR programs are limited to borrowers of direct loans. If you have any loans that are not directly from the government, combining them will make them eligible for all IDR programs.

The progress you’ve made on any direct loans under an IDR plan would be lost, though, if you consolidate them into a new loan. The previous loan no longer exists, thus the result.

If you’ve been paying on one of your direct loans under an IDR plan for a year and want to apply for PSLF, here’s what you need to know. That means you simply need to keep making payments on the loan for another nine years before the debt is erased.

But you owe money for more schooling, too. Then, in an effort to speed up your progress toward PSLF, you choose to combine all of your loans and place them into IDR. If you do that, whatever interest you’ve already paid on the initial loan will be erased, and you’ll start paying it back from the beginning. As a result, you’ll have to make payments on that debt for 10 years instead of 9.

To maximize your chances of qualifying for PSLF, you should consolidate your other loans without including the original one on your new direct consolidation loan application.

  1. You’ve Got a Parent PLUS Loan

Don’t combine your student loans if you’re still making payments on both your undergraduate loans and any parent PLUS loans you may have taken out to cover your child’s schooling costs.

You will no longer be eligible to participate in any IDR scheme other than the least desirable choice, income-contingent repayment (ICR). If you use the Income Cap Ratio (ICR) method to determine how much disposable income you have, your monthly payments will consume a larger share of your income.

It’s important to note that although both students and parents have the option to combine their loans, they cannot do it together. Only debts owed by you can be consolidated.

  1. You Wish to Combine Private and Federal Loans

Consolidating federal loans requires participation in the federal direct consolidation program. The only method to combine private and government loans into one payment is through refinancing.

When you refinance, all of your existing debts become one large loan. However, a private lender rather than the government provides the funding.

And, there are costs associated with refinancing. Being eligible might be challenging because a high credit score is typically required. Also, since you would no longer have a federal loan but rather a private one if you combine the two, you will no longer be eligible for any federal repayment schemes if you choose to perform a combined refinancing. As an example, IDR and more lenient forbearance and forgiving policies.

  1. You Would Like to Save Money on Repayment

Consolidating your loans may lessen your monthly outlay and make making payments easier, but it won’t save you money in the long term.

To begin with, consolidating your debt will not reduce your interest rate. Your new consolidation loan interest rate is calculated by rounding up the average of your existing loan interest rates to the closest one-eightieth of one percent. That implies it will remain mostly unchanged from before.

Second, if you choose a repayment period that is more than 10 years, you may end up spending thousands of dollars more in interest charges than you would have with a shorter term.

Finally, any unpaid interest will be added to your principal balance at the time of consolidation. It’s added to the principal, so you’ll be paying interest on a bigger total debt when the consolidation loan is paid off. Or put it another way, interest is added to interest.

If you’re in a position to do so, refinancing is your sole option for lowering your monthly payment on many loans at once while also consolidating them into one manageable amount. SoFi and other private refinancing lenders compete with one another by providing the lowest interest rates possible on student loans. When the interest rate on a loan is reduced, the total amount repaid is less, and the monthly payment may be reduced as well. Never refinance a federal loan without careful consideration, as doing so might result in losing eligibility for further government assistance.

Bottom Line

It might be difficult to determine how to effectively repay student debt. It entails comparing your current living and financial situation with your future savings potential under each possible student loan payback plan. It’s bad enough that recent grads may have trouble finding work, but entry-level positions frequently don’t pay much even if they do.

Many options exist to facilitate the repayment of federal student loans, which is a great relief. Better yet, you are not obligated to use the vast majority of them. You have the flexibility to adjust your repayment plan whenever your circumstances or income change.

Consolidation, however, is not like that at all. Consolidating your debts means that your previous loans are canceled and no longer an option. Don’t rush towards consolidation without thoroughly considering the long-term implications.

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