Pitfalls to Avoid When Consolidating Your Student Loans

There aren't too many drawbacks to consolidating your students loans; most people save time and money when they do. However, make sure that you avoid some of the student loan consolidation traps that can actually cost you money and give your headaches.

Avoiding Common Mistakes

Potentially, the biggest mistake is consolidating at the wrong time. Consider waiting until you've graduated before consolidating your student loans. You can unwittingly give up some benefits in the process. In most cases, when you graduate, you have a grace period of six months before you are required to begin paying your student loans. You can often get a lower rate if you consolidate during that grace period. Ask your school's financial aid office if you are worried about the correct time to consolidate.

If you follow the economy, you may want to wait until the interest rates are very low before consolidating. If rates are high during your grace period, it could benefit you to pay for a while and wait for rates to come down. When you consolidate, you want to choose a consolidation program that lets you lock in a fixed rate. Locking in the best rate possible can save you a lot of money in the future, especially if rates climb higher.

If you are a recent graduate and you are starting an entry level job, you may care more about your monthly payment than your interest rate. You can look for an extended repayment plan that stretches your payback period for a longer time. Be aware that you will spend more in interest over the long run. However, you can save by paying the low monthly payments now, and when you start earning more money, you can pay more than the required payment. This will help you pay off the loan faster and avoid extra interest.

An Ounce of Prevention

If you're still in school, take a little time to create a good situation for yourself before you need to consolidate. You want to avoid having loans from only one source. If you've only borrowed from one lender, you should still be able to re-package the loans, but you'll lose many of the benefits of consolidation. If you've only been using one lender, ask your school's financial aid office for names of some different lenders. Switching from one to three lenders can give you huge benefits when it comes to consolidation time.

Also avoid consolidating your loans with your spouse's. It might save you a lot of time to send in one monthly payment for both of you, but it can hurt you down the line. If you lose your job, you can't go into deferment unless your spouse also qualifies for deferment. Another benefit of student loans is that they are discharged in the event of your death. If you consolidated your student loans with your spouse's and one of you passed away, the survivor would still be responsible for both loans!

If you can avoid these common pitfalls, you'll be able to enjoy a low monthly payment for the remainder of your loan. Consolidation is right for almost any former student, so take advantage! You'll be glad that you did.

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