Student Loans: Is Consolidation the Answer?

Every June, thousands of student loan borrowers receive notice after notice from companies soliciting them to consolidate their existing loans. It is true that July brings changes in interest rates, but should you be concerned? The answer is yes and no, and it depends on your situation, both personally and professionally. For many people choosing not to consolidate their loan actually provides them with long-term advantages as opposed to the consolidation route.

If you graduated college with the intention to become a public school teacher or other public servant with the intention of having your student loan forgiven, I would advise against consolidation. First, some states will not allow you to participate in a loan forgiveness program if the loan is consolidated, and second, if the state you are in decides to adopt that rule, then you may be out the assistance you have been working for.

Another benefit to non-loan consolidation is income tax relief. Yes, both consolidated and non-consolidated borrowers may be eligible to deduct student loan interest paid for the previous calendar year up to $2,500, but in some situations it may be beneficial to calculate finances before any consolidation decisions are made. The IRS allows single filers who’s modified adjusted gross income (MAGI) is up to $50,000 and joint filers who’s MAGI is up to $105,000 to deduct student loan interest up to $2,500 per calendar year. If a person’s MAGI is between $50,000 to $65,000 filing for single, or joint filers who’s MAGI is $105,000 to $135,000 are still allowed to take a deduction of student loan interest, however, that amount will be less than the maximum allowable $2,500 deduction. Any single or joint filers who’s MAGI are above the allowable limits (over $65,000 single or $135,000 joint) are not eligible to claim any student loan interest deductions for the previous calendar year.

When looking at the disadvantages of loan consolidation, there are some advantages out there to people who qualify. For people who’s modified adjusted gross income is over the allowable limits, loan consolidation is a wise investment to lower monthly payments. Be careful to remember though, if you are planning to have your loan forgiven to do the research and ask if loan consolidation will affect your status in the program.

In the end, student loan consolidation can seem like a risky venture, but with proper knowledge about your finances and career plans, an educated consumer can become informed and make the best financial decision to fit their needs. When in doubt, remember this: June’s notices to consolidate will be appearing in next year’s mailboxes, so if now is not the right time for you to make your decision, there will be more opportunities coming every year.