reductions in interest rates, or even make it a bit easier to manage all your monthly student loan repayments.
This article will give you some information about what consolidating student loans actually means.
Make Your Payments Easier To Handle
If the debt you carry from funding your educational goals has become a burden you cannot handle because of the countless payments and cumbersome variable interest rates, then consolidating your student loans could be the best way to secure one fixed rate for the entire length of your loan.
Pay A Single Lender
Being able to consolidate your student loans often means a single lender will combine all your loans into one loan. this new lender will first buy out your other loans and will then become your primary lender.
One Payment With A Lower Interest Rate
Instead of having to manage tons of accounts at one time, the consolidated loan will be one payment that already has all your other loans attached to it– at a fixed, potentially lower, rate.
Even though consolidating your loans may seem like a good choice, you should still investigate other options. This is because consolidating student loans can have regulations attached that might not be the best for every person or situation.
Consolidating your federal student loans can be one manner to simplify your payments while managing your debt. For these cases, only the loans that come from the same borrower have the potential to be combined into one single loan along with the fixed interest rate.
Interest rates of new loans are based on weighted averages of interest rates of all the loans being consolidated, usually rounded up to one eighth a percent, but never exceeding 8.25 percent.
- No borrower can consolidate loans of their spouse’s.
- Parent do not have the ability to consolidate PLUS loans with the student’s loans.
- Students cannot consolidate private loans with federal ones.
Pros And Cons Of Consolidating Your Student Loans
Advantages:
- One monthly payment
- They give a longer payment period which is determined by how much your principal is. The maximum is thirty years.
- The extended periods will result in even lower payments
- Flexibility of payments: forbearance and deferment options
- Credit Checks not required (unless PLUS loans)
- Fixed Interest rates
- No prepayment penalties or fees
Disadvantages:
- Higher interest paid over time
- There’s no grace period, so payment starts immediately
- Weight average of interest rates might mean a higher interest rate
- You could lose loan forgiveness and deferment benefits in Perkins and Nursing Loans.
Federal Student Loan Consolidation
Federal student loan consolidation is a common feature for those who are facing paying back their loans six months following graduation. The program for consolidating government backed loans, which go by a variety of names, is straightforward, and is a favorite program for granduates.
The United States Department of Education recognizes that a student’s larger number of individual loans will have different interest rates, terms, and monthly payment amounts.
That means that the student, following separation from school, will be facing an array of payments, due on different dates, and terminating at different times.
Direct Loans
Direct loan consolidation is intended to simplify this part of the student loan picture.
Weighted Averages
Federal student loan consolidation allows the student to combine all loans into a single loan with a single payment. The interest rate is set based on a weighted average.
A weighted average is arrived at by taking all of the various rates, and giving each of them weight based on the loan amount. The weighted figure is then averaged, leaving the student with a single rate that is higher with respect to some of the original loans, and lower in others.
Advantages:
There are distinct advantages to direct consolidation of government loans. The most obvious is reduction of the monthly payment amount.
Large loan payments are a concern for anyone, and this is even more true for graduates entering a poor job market. Consolidation may make a great difference for recent graduates, sometimes reducing their payments by 50% or more.
Available For Everyone
Another advantage is that the program is government sponsored, free, and available to anyone. There is no credit check, income requirement, or other underwriting involved.
The Department of Education is more concerned about being paid back than it is with any particular timetable. The federal government recognizes that putting undue pressure on recent graduates can have a negative outcome in the long run.
No Penalty For Early Payment
Consolidation increases the government’s prospects for being fully repaid. With this in mind, there is no penalty for paying off all of the loans early.
As another advantage, while consolidation is only available one time following separation, if a student returns to school he or she may take out new loans and re consolidate them upon graduation.
Disadvantages:
There are few disadvantages of direct loan consolidation by the Department of Education. The principal issue is that stretching out payments for smaller, shorter term loans will eventually result in paying more interest.
It also means that the student will be in debt for a greater time. Another disadvantage is more of a limitation, in that private student loans cannot be included in the direct consolidation program.
Private Student Loan Consolidation
Private student loan consolidation serves the same purpose as its government counterpart.
Consolidation of loans offered by private lenders serves to lower the overall payment.
Unlike government loans, once a student is separated from school, he or she is not backed by the government program and is subject to underwriting. That means that obtaining a private student loan consolidation is very much the same as obtaining a new loan.
Advantages:
The main reason to consolidate any private loan is to secure a lower payment. A wise borrower will not do this by drastically increasing the interest rate paid, or substantially extending the term.
At the same time, there is no point in setting a payment that is so high the graduate is not likely to be able to meet it, simply for the sake of shortening the term of the loan. Because there are costs to private consolidation, it should only be done when it makes economic sense.
Disadvantages:
A primary disadvantage is being talked into consolidating federal loans into a private program.
This should never be done.
Don’t Lose Federal Rights
Federal loans carry rights that will be forever lost if the loans are considered to be paid off by a private bank.
The federal government, unlike a private lender, will offer forbearance on a loan. This means that, under certain circumstances, the Department of Education will temporarily halt payments.
The federal government may also offer an scaled repayment plan based on income and other options that a private lender will not consider.
Another key problem with private student loan consolidation is the fact that they are based on traditional underwriting.
