When students graduate with student loans, many are encouraged to consolidate them. This seems like a good idea because it reduces the number of monthly payments needed and, many believe, saves money. Few graduates look into what consolidation does, though, or realize that there are drawbacks to it. Here are some things that graduates may not realize.
1. Consolidating student loans does not save money. Consolidation means that all loans are paid off by one new loan, which is the total of the smaller ones. The interest rate is calculated as the weighted average of the rates of the smaller loans. A small extra amount is then added to that average. The result is that graduates do not save money on interest by consolidating.
2. It is no longer possible to strategically pay off the smaller loans. Graduates who do not consolidate can pay extra to their smallest student loan or the loan with the highest interest, paying it off quickly. Within a few years, it may be possible to pay off a loan or two, which is not possible if the loans are consolidated.
3. Consolidating student loans eliminates the grace period or the time between graduating and when the borrower must make their first payment. Those who want to consolidate should do so towards the end of their grace period to take advantage of this benefit.
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