As we enter the back-to-school season, many college students may have applied and been approved for a student loan for the upcoming academic year. While students and parents alike welcome the additional assistance in paying for their tuition, the appeal starts to wear off upon graduation when the responsibility to pay back the loan begins. Recent reports show that “the average Class of 2016 graduate has $37,172 in student loan debt, up six percent from last year” and that the average monthly student loan payment is $351 (source). Often times loans are accumulated from various sources and consolidated down to one loan with the lowest interest rate or most favorable repayment option. However, depending on the type of loans you have outstanding, it may not be in your best interest to consolidate.
So, how do you determine if you should consolidate your student loans? First, identify the type and details of the loan. Student loans can either be a Federal loan or a private loan. Federal loans are further broken down among various programs, i.e. Direct loans, Federal Family Education Loan (FFEL), Stafford loans, and PLUS. Many of the Federal student loans offer flexible repayment options based on your income and sometimes loan forgiveness if a loan isn’t paid after a certain term and/or you meet certain qualifications. On the other hand, private loans are bound by the terms of the promissory note and may not have the flexibility that Federal loans do. So, if you refinance your existing Federal loans into a private loan you lose access to the flexible repayment programs and potential forgiveness which may not be to your benefit long term – even if the interest rate is lower.
Once you have organized and identified your loan by type, you can begin to analyze if it makes sense to consolidate your Federal loans through the Federal Direct Consolidation Program or to refinance your private loans into a new loan with a lower interest rate or more favorable term. The Federal Direct Consolidation Program combines multiple Federal loans into one and also allows some FFEL loans taken out before July 2010 to become eligible for the favorable repayment plans that may not have originally been available.
If you are considering consolidating or refinancing your student loans, contact Sharkey, Howes & Javer to further discuss what option may best fit your current financial situation as well as your long-term goals.