School loan consolidation may be a good investment for some individuals. School loans come in a variety of types. Some types of loans may not be consolidated while others should be. If you have a student loan, talk to your loan holder first about the type of loan you have. Is it a private or federal loan? The type of loan you have also will tell you how you can refinance it or consolidate it into another loan. In many cases, consolidating student loans makes them far more affordable. It can be one of the best ways to see a drop in the costs your monthly student loan payments.
What is Consolidation?
Consolidating student loans is the process of combining several smaller loans into one larger one. Most students will have several small loans from various lenders by the time they are done with school. The problem is, this can make repayment difficult and time consuming. In addition, many of these loans will have different interest rates. Therefore, you may be tempted to consolidate all of the loans into one payment. Here is how the process works. You work with a student loan consolidation lender. They are able to give you one larger loan. This loan is used to pay off all of the other loans you have, including smaller loans. This means that you only have one payment to make at the end of the month (assuming all of your student loans have been included in the next consolidation loan.)
Most types of loans can be refinanced, as it is often called. Student loan consolidation is available for most federal loans, too. This includes your FFELP loans such as the PLUS, SLS and Stafford loans. It also includes Perkins loans, FISL, Health Professional Student Loans, HEAL loans, Guaranteed Student Loans, NSL and direct student loans. If you are unsure of the type of loan you have, simply contact the lender and request this information. It is important to note that even though you are consolidating these loans, they are still legally required to be paid off. They cannot be filed through a bankruptcy, as with private loans. All student loans are guaranteed to be paid back to the lender. Therefore, consolidating these loans does not get you off the hook from paying them back.
You may also be able to obtain a consolidation for other types of private loans you might have. Private student loans are loans obtained from local lenders, private companies or other non federal lenders. These loans are subject to the contracts that you signed. If you have it, read through the contract and determine what the requirements of consolidation or refinancing the loan are. Some of these loans may limit you from consolidating these loans with others. You also are unlikely to be able to mix both federal loans and private loans into the same consolidation loan, in some cases. Private consolidation loans may be an option for some people. Be sure to let your potential lender know that you do have a private loan.
When getting any type of loan, the first thing you should look for is the interest rate. The interest rates on student loans are determined in several ways. First, you do want to have the lowest interest rate possible. Keep in mind the process that interest rates are calculated for consolidation. The interest rate is a weighted average of the interest loans that you are placing into consolidation. This number is then rounded up to the nearest one eighth percentage. The highest that a consolidation loan for a student loan can be is 8.25 percent. This is relatively low compared to other types of loans, of course.
If you have only one type of loan, from one type of lender, consolidating these loans may cost a bit more. For example, if you have several Stafford loans and each of them has the same fixed interest rate. The interest rate would adjust slightly from 6.8 percent (for example) to 6.78 percent (the interest rate is six and 7/8ths of a percent.) Therefore, the increase in the interest rate here still makes this loan affordable.
However, in some situations, it can be far better of a scenario. For example, let’s say you have several types of loans and each one has a different interest rate. The weighted average of the loan is going to lie in between the lowest and the highest numbers. Therefore, you are likely to see at least some of the loans come down in interest with this new loan. Of course, it is important to compare all of your options and to look for the lender giving you the lowest possible loan interest if you have a private loan and are looking for consolidation.
As you consider consolidating student loans, keep in mind that student loans do have this weighted average. In other words, if you see ads promoting the lowest interest rate possible, this is misleading. Due to the structure of the consolidation, the fundamental cost of the loan will remain the same. You cannot cut your costs too far with this type of consolidation. Your interest rate may be lower than the highest interest rate you have. At the same time, it will be higher than the lowest interest rate you have as well. Over the lifetime of the loan, it is designed to require you to pay the same amount in interest as you could have if you kept the original structure of the loan.
Still, student loan consolidation does make sense. For some people, it makes for a lower monthly payment to lenders. For others, it allows them to pay off the loan over a longer term so they can have a more affordable payment. Carefully consider the benefits of student loan consolidation I your own situation. Keep in mind that student loan consolidation is not always available since you do have to have a good credit score and employment, though these loans are very safe to lenders and therefore they are more readily available than others.