DrA said:
Are there any disadvantages to consolidation??
Sure, there can be disadvantages, depending on your particular situation and the details of the consolidation loan. Here are three I can think of offhand:
(1) You usually lose your 6-month grace period (not with Direct Loans, but with most private lenders like SallieMae). However, for most people with lots of loans this isn't really a big issue because they can just apply for an economic hardship deferment when they start their internship. You can get a maximum of 36 months from this deferment, as well as an unlimited deferment during fellowship regardless of your loan amount or your income, so the only way it's a problem is if your residency is longer than 3 years. If that happens, you'll have to start making some payments until you begin a fellowship or until you start making a real salary, in which case it's not a big deal anymore. However, there's still always the forbearance option for those who just can't make the payments. It's not ideal, but sometimes necessary. Still, the interest savings can be huge enough to make it worthwhile. For me, locking in 2.875% last year on about $90,000 in loans was a no-brainer. If I had waited, just to save my grace period, I would now be looking at a rate that will soon be over 6% (and I'd be kicking myself!)
(2) You generally lose any other special benefits of the original loans when you consolidate. Every lender is different, but this is generally how it works. For example, with SallieMae there's a "healthier returns" program with their "Medloans." This benefit gives you something like 3 or 4% cash back upon graduation, based on the original loan amount. You can even have it applied right back to the principle if you'd like, which is nice since lenders generally capitalize your loans when you graduate. But if you complete your consolidation before graduation you LOSE this benefit for those loans. However, most consolidation loans have their own set of benefits, such as a 1% reduction in interest rate after you make 33 on-time payments, or a 0.25% interest rate reduction if you pay by automatic draft from your account. And if you're locking in a really low interest rate when it would otherwise go up then it's still a great deal to consolidate. The lower interest over the life of the loan typically FAR outweighs these little benefits. On $100,000 in loans paid back over 30 years you can easily pay 50 to $100,000 in just interest, so make sure you don't miss the big picture just to get a measely $2,000 in cash in your pocket at graduation. That's what lenders WANT you do to though, because then they'll make more money off your payments over 30 years!
(3) Theoretically, the interest rate could go DOWN. This is a potential downside to consolidation since it locks you into a particular rate for the life of the loan, although it's pretty certain this time around that rates will rise from 4.7% to well over 6%. However, when I consolidated some of my college loans 4-5 years ago I locked in what was then a "lowest ever fantastic rate" that turned out to be just one more step down in a longer downward trend. So I locked in at around 5% and watched the rate drop as low as 2.7% a few years later!!! Now I'm stuck with 5% on those loans unless I re-consolidate with other loans that have a lower rate, in which case they do a "weighted average" to figure out what the new rate on the loans would be. BUT, as I said earlier, it's quite certain that rates are going up again on July 1st and the whole student loan program may change over the next few years, so it's tough to argue that consolidation would be a BAD idea aside from a few unusual situations for a few unusual people.
Overall, the student loan game is just like the stock market...you're VERY lucky if you can buy up a stock at it's absolute low, or sell one at its absolute high. You'll almost never get the "lowest ever rate" on your loans. But don't let the "best" be the enemy of the "good." Instead, you need to crunch the numbers, be smart, and just go for what looks best at this time. There'll always be someone with a lower interest rate than you, but it's still probably be better to lock in an ALMOST lowest-ever rate now than to adopt a "wait-and-see" attitude, which can be very costly if the rates continue to rise as expected (and if the loan program is fundamentally re-structured). It's better to lock in 4.7% and wish you could have had 2.875% last year than to sit this one out and get stuck with 8% in a couple years (or worse, a re-designed loan system that prevents fixed rate consolidation, as President Bush proposed!)
