If you have multiple student loans, it probably seems that there is nothing basic about consolidating them. Different lenders, benefits, interest rates, and loan terms complicate things to a point that it can seem overwhelming. However, there are some basic principles that can help you to determine how to approach the loan consolidation process as well as which options are best for your personal and financial needs.
What is a student loan consolidation?
It is important that you first understand what exactly student loan consolidation is. Consolidation means to combine. However, you are not actually combining your student loans. You are, in fact, starting a new one. Your new lender will purchase all of your existing loans and give you one, easy to manage loan. This can make loan repayment less stressful and less confusing.
Private and Government
Although each type of loan has many different branches, there are two basic types of loans; government and private. Government loans are provided to you by the federal government through a government lender. Private loans are provided to you through a private lender, often a bank.
Federal loans do not vary from one lender to the next. In fact, the government ensures that this does not happen by placing federal regulations on factors like interest rates and repayment terms. The government also ensures that there is never an application cost or origination fee for federally funded student loans.
Private lenders are not subject to government terms. This means that interest rates and fees will vary from one lender to the next. Interest rates available to government lenders are not available to private lenders, leaving you with higher interest rates. Benefits that are often available through federally funded loans are not available with private loans and interest rates are higher.
When obtaining your loans or consolidating, it is best if you exhaust all of your federally funded options first. This will ensure that you receive the most benefits and the best rates.
Consolidating your loans
Private lenders will often encourage you to combine your government loans with your private loans. This is not your best choice. Because private lenders cannot offer you the same benefits or the best rates, it is best to keep federal and private loans separate, even if you wish to consolidate.
There are government consolidation plans that make this possible. Government lenders will not purchase your private lender loans. However, all of your federally funded educational loans can be purchased by a government lender. If you are in default on any of your payments, your options will be more limited. However, Direct Loans do allow you to consolidate, even if you are in deferment.
Lower payments or shorter term?
Lower monthly payments may seem convenient. It may even give you the feeling that you are saving money. However, a longer loan repayment term will actually end up costing you more money over the life of the loan. Depending on your situation, this could result in even thousands of extra dollars that you would not have paid, had you accepted a shorter loan repayment term.
If your financial situation prevents you from making a higher loan payment, then utilize the beginning of your loan term to acquire career goals that will increase your income over time. By doing this, you can increase your payments, decreasing the length of the loan. Although you may still have to pay a little more in interest, you will still be paying less than if you had carried the loan all the way to term.
Should you consolidate?
This is a question that every graduate, parent, and student needs to consider before signing any consolidation paperwork. Although consolidation carries many benefits, it is not without disadvantages. Lower monthly payments are often traded for higher costs for the life of the loan. Grace periods are forfeited. Benefits are lost. Although some of these factors may not apply to all loans or situations, the loss in other situations can be more trouble than it is worth.
If you do not have much left on your loan to pay, you will find that the overall cost of consolidating your loan is much more than the savings you receive for a few more short months. If you are not having any trouble making your payments, extending the life of your loan will cost you even more over time.
Borrowers with Perkins loans can lose benefits that might have otherwise provided them with debt forgiveness. In these situations, consolidation may not be the best choice. How student loan consolidation will impact your financial situation today and in your future should be taken into consideration.
Student loan consolidation is not for everyone. For some students, it allows them to make timely payments without the worry of missing a payment and suffering the consequences. For others, consolidation is an option that can hinder their financial future. By understanding the basics about student loan consolidation, you can determine if it is the right option for you.
Student loan consolidation can be an effective means of managing debt for some graduates. However, for some, consolidation is not a viable option. Before moving forward with a student loan consolidation plan, it is essential that you take the time to consider all of the advantages and disadvantages of taking this approach to managing your educational debt.
Student loan consolidation was first introduced in the mid 1980’s. Originally, it was designed to provide a low interest solution to students struggling to pay their educational debts. Loan rates were usually better for borrowers who sought after student loan consolidation, saving them money and enabling them to make timely loan payments.