If you have just graduated from college, the likelihood is that
you are under a large amount of debt in the form of student
loans. You might be wondering if there is any way to reduce the
amount you have to pay. One solution for reducing your
debt is to consolidate your student loans.
Student loan consolidation is similar to refinancing a house on
better terms: although the principal of the loan will not be affected,
the interest rates you can lock in when you consolidate student loans
to a fixed rate can be substantially better, reducing your monthly
payments by up to forty percent. Plus, you might be able to stretch
out your payment time to reduce your monthly payment amount
even further.
The disadvantage when you consolidate student loans during your
initial six-month grace period is that you must start making your
payments right away. This can be difficult if you have not found
a job after graduation, although you can wait until just before the
grace period ends to consolidate, and still receive the lower rates.
Furthermore, once you have consolidated your student loans, you
cannot un-consolidate them again, so make sure to consider your
choice carefully.
How is Interest Calculated When I Consolidate Student Loans?
When you consolidate student loans, your lending company pays off
your government loan and issues you a new loan under its own name.
The typical way to determine the interest rate on the new loan is to
take the average interest rates on all of the student loans, and offer
a new rate that is an eighth of a percentage point higher (up to a
maximum interest rate of 8.25%).
Although agreeing to a higher interest rate might not sound like a
good reason to consolidate student loans, this rate is fixed over
the life of the loan, whereas the government rates will fluctuate.
Since rates are at an all time low right now, locking in the current
rates might be a good idea.
Furthermore, many banks give you ways to bring down the
percentage rates. For example, some lending institutions will
drop the rate by as much as a quarter point if you agree to
automatic deductions from a checking or savings account, whereas
others drop the rates after a certain number of timely
payments. As an additional bonus, there is no penalty for paying
off your consolidated loan early.
When Would You *Not* Want to Consolidate Student Loans?
Before you decide to consolidate student loans, you should
carefully consider your alternatives. For example, did you
realize that it might be possible to have your student loan
cancelled altogether? Student loan forgiveness options include
volunteering, for the Peace Corps for example, or working for the
government in a low-income area as a teacher or
doctor. Cancellation is not possible, however, after you have
consolidated your student loans. If this kind of work
interests you and is available, it could be a better option than
loan consolidation.
Another time to hesitate before you choose to consolidate student
loans is when you are close to finishing your payments.
Stepping up the payments and saving yourself some interest and
the hassle of consolidation might be more advantageous
to you.
Finally, there are loans that you might want to keep open because
they offer special advantages. For example, if you are
considering going back to school and you have a Perkins loan, you
would not want to consolidate that with your other student loans.
The government will pay all interest on Perkins
loans while you are in school, but if you have chosen to
consolidate student loans, you will not be able to receive this
benefit. You could always choose to leave any special
kinds of loans out of the consolidation mix, however.
By: Mark Kessler
Posts Tagged ‘Consolidated Loans’
When Should You Consolidate Student Loans?
February 1st, 2010Why You Should Consolidate Your Student Loan Debt
January 10th, 2010
Do you have student loan debt? If you graduated from school, chances are you took out loans to afford it. School isn’t cheap, even more if you go to a private school and stay on campus. Add together room and board, plus tuition and fees, plus other expenses and you get an expensive college education. Multiply it by at least 4 years and you get a pretty hefty student loan.
After you have graduated from your university and have these student loans, you may run into a problem. Maybe you don’t get a job as soon as you need to or it’s not as high-paying as you thought it would be. If this happens, you might find yourself having trouble paying off the debt. What happens next?
Consolidation of your loans could be the right choice. Mostly likely you have both federal student loans and private student loans. If you can consolidate these loans, the consolidated loans could have a lower rate of interest, and you can usually get a smaller monthly payment which lets you pay the payments more easily.
Most of the time, you can consolidate federal and private loans separately. Federal loans often have a much lower interest rate than private loans. When you can decrease your debt into one or two low payments, you will be able to manage your money easier and afford your life more easily.
Ultimately, don’t put off paying back your student loans for too much time. The sooner you pay them back, the less amount you’ll pay in interest, and the sooner you can move onto other more important goals such as saving for a house, car, etc. Build an efficient budget and financial plan to move further in your financial life after college.
By: Samantha Asher