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.
If you have already determined that loan consolidation is the best option for your personal and financial situation, it is important to be a comparison shopper. Do not settle for the first lender you find. Instead, take the time to carefully compare lenders and their benefits. Consider all of your options and seek understanding of what you are agreeing to.
You are agreeing to a new loan
It is important that you understand that by consolidating your loans, you are acquiring a new loan. Although the word, “consolidate” means to combine, this is not actually what is happening. Once the loan is initiated, your new lender will purchase all of your current loans, paying them off. You now have one lender to repay for the total amount owed on your student loans. You now have a new loan with a new lender and new benefits.
Types of consolidation loans
There are a number of consolidation loans. However, they can be grouped into one of two classifications; private and government. Government consolidation loans tend to offer more benefits and should be where you check first.
Federal lenders are regulated by the government. The loan terms and maximum interest rate are determined and do not fluctuate between different government lenders. Federal lenders do not perform a credit check, do not use co-buyers, and do not penalize you for paying your loan off early. This can be a big advantage if you have credit problems but still want to consolidate your student loans.
Because there is no difference in interest rates, fees, and credit check options between federal lenders, benefits that they provide will be your comparison guide . Stafford consolidation loans are available through the FEEL program. PLUS consolidation loans are available through two different options; FFELP lenders and the Direct Loan Consolidation Program. Before deciding on which type of government loan you want, consult with an account manager. They can best help you to determine which government loan is right for you.
Private lenders are not subject to federal terms and guidelines. Rates and fees can vary from lender to lender. Additionally, interest subsidies are not available through a private lender. However, private lenders are also able to offer interest reductions for timely payments or automatic payments. Not all private lenders offer this benefit so it is important to check with each lender to find out which benefits they have to offer you.
Private lenders often base their rates upon your credit. If you have bad credit, private loans may be difficult for you to secure. Because private lender rates are not regulated by the government, you may find that you end up paying a higher interest rate. Compare private lenders carefully to ensure that you find the best options.
Some private lending institutions are government approved and do participate in the Federal Family Education Loan Program. These lenders carry many of the same benefits as government lenders. You can find a list of private lenders that participate in government programs by visiting FinAid.org.
Perkins loan consolidation
Although many graduates do decide to roll their Perkins student loan in with their consolidation, this is an action you should consider carefully. Perkins loans come with a number of benefits including the right to cancel your loan if you decide to become a teacher of science, math, or special education. By adding your Perkins loan to your consolidation, you lose all benefits that your Perkins loan originally offered to you. Before consolidating your Perkins loan, consult your Perkins lender to determine if this is the right option for your situation.
Consolidating during your grace period
During the grace period of your loans, you have the lowest rate available for your government loans. This rate can be locked in by applying for consolidation before your grace period ends. However, it is important to know that doing this will cause you to lose the remainder of your grace period. Repayment of your loan will begin as soon as the consolidation terms are finalized. If you are not currently employed, this may not be an option for you.
Wrapping it all up
Student loan consolidation packages come with a variety of advantages, disadvantages, interest rates, terms, and requirements. Before committing to any specific lender, take the time to consider all of your options. If needed, consult an account manager or contact the Department of Education. They can help you to compare your personal and financial situation to different lenders and find the right lender for your individual needs.