It is a universal truth that education is the best wealth one has acquired till date. It is always achieved at a cost. Students pursue education to gain financial success. But education itself requires to be financed when one is a student. Students and their parents tap all resources to achieve this ambition in life. Student loans form the major resource globally. Families borrow from various resources. The lenders provide grace period to start repaying the loans.
But, once the grace period over, the repayments to various lenders become due. It is almost a full time job to work out the payment schedule to individual lender, arrange for money and pay each one of them on due dates. Paying different lenders during a month on different dates could be a frustrating experience. The borrower is answerable to too many lenders at times that he is likely to skip a repayment or two.
of all your student loan debts into one single payment
could solve such a situation. You are answerable to only one
lender. Consolidation of debt has other benefits. By intelligent
shopping in the market, you may choose a lender who offers
a consolidated loan for a lesser cost repayable over a longer
duration. In essence, you create a more manageable debt rather
than totally solving your debt related problem.
However, federal student loans are guaranteed by the government
of the United States of America. Hence they are consolidated
in a different manner from other general loans. The Federal
Government devised the student loan consolidation program
mainly to make education affordable.
It is also intended to encourage students to pursue education
and thereby increase their earning capacity. A Federal
Student Consolidation Loan takes over and repays all
your eligible federal debts. It replaces the same with a single
consolidated loan repayable only to the U.S government.
The repayment period is generally longer. Installments stipulated are made affordable. However, it allows you to prepay the loan without charging any penalty. The consolidated loan generally stipulates interest that is the weighted average of all the existing loans. It is a fixed rate and extends over the period of the loan. The rates of the consolidated loans are generally lower.
Students do not pay fees towards consolidation unlike private loan consolidation. The lenders meet the cost of consolidation. There is no credit check for the students. There are no co-signers involved. Repayment period is always customized to suit the needs of individual student. Ultimately, it provides financial flexibility in repayments.
Why should a student consolidate his loans?
a) It permits you the convenience of consolidating all your student loans into a single repayment loan.
b) Monthly repayment is usually lower than the original repayment plan.
c) If you are paying variable interest rates, you must consider consolidation. Interest rate is fixed for the term of the loan without fluctuation.
d) If you have trouble meeting your monthly commitment, you wish to avoid defaulting and you have exhausted all other resources, you may think of consolidating your loans.
e) You may have too many lenders to cope with that you cannot keep track of easily, and then too you may consolidate.
You should be an informed customer before venturing into the process of consolidation.
Different kinds of loan programs:
a) The Direct Loan Program: The loan is provided directly by the Education Dept of the Federal government either to students or to their family members.
b) Federal Family Education Loan (FFEL) Programs ? These loans are provided by private lenders to the students and their families. They are subsidized by the federal government.
c) Stafford Loans ? These student loans are granted through Direct and FEFL programs.
d) Plus Loans- Loans are disbursed to parents through Direct and FEFL loans. . The loans are meant to meet the educational expenses of their undergraduate children. However the students must be dependent on their parents to be eligible.
e) Graduate/Professional Plus Loans ? The term and conditions are the same as applicable to Plus Loans.
From the above, it can be seen that the federal consolidation loans are brought under two programs ?
a) Direct Loan Program and
b) Federal Family Education Loan (FFEL) Programs.
These programs do simplify the nuances and pains of several repayments into a single repayment loan.
Differences between direct and FFEL loans:
a) While Direct Loans are grant by the federal government through its Education Department, EEFL is a federally guaranteed student loan. Borrower must hold at least one direct loan to qualify.
b) Each program differs in the types of loans consolidated.
c) Direct Loan insists prior lender relationship with the student.
d) Convenience of electronic debits towards repayments is offered by Direct Loan.
e) Repayment options available are different.
f) Minimum balance and number of loan accounts to qualify differ.
What should you do while/before consolidating?
- The lenders generally allow you a grace period between availing the loan and starting your repayment schedule. Determine the monthly payment required if you are under grace period from your lender.
- If the amount exceeds your income or resources, it is always better to consolidate with a lower repayment schedule.
- Next select the accounts you may wish to consolidate. Calculate the cost by way of interest for consolidation. If the interest cost on the consolidated loan is lower than the existing loans, you may consider consolidating them.
- A Direct loan takes away your grace period under the existing loan. EEFL permits you to avail the remaining period of grace if you are right in the middle of it. Some EEFL lenders may be prepared to with hold disbursement of the consolidation loan till the end of the grace period. Hence it would be wise to ascertain these facts beforehand. It is better to apply for consolidation loan at least 2 to 3 months before the end of grace period for the procedural details to be completed in time.
- Consolidation loan locks in your interest rate for the rest of your loan period. If you can consolidate during grace period of the existing loans, interest rate can be locked at a slightly lower rate than the current market rate.
- You must remember to continue repayments if you are in the repayment mode, till actual consolidation.
- If you have nearly paid off your dues and left with a small amount, there may not be any point in extending the loan.
Repayments and interest cost:
Repayment schedule commences after 60 days of disbursement. The term of repayment varies between 10 ? 30 years depending on the amount of consolidated loan and your option as to the period. There is an aspect of repayment to consider here. You may opt to repay in 30 years in smaller monthly payments. Under such circumstances, your consolidation cost may even double. You may end up paying more interest availing longer time to repay. You must compare the cost of unconsolidated loans and the consolidation loan and decide to your benefit. At times, non-consolidated loan schemes may offer you a few borrower benefits like principal rebates, discounted interest rates and even loan waiver benefits. These concessions do reduce the cost of loans. These benefits may not be extended under consolidated loans. You should consider the impact of losing these benefits before opting for consolidation loan.
Students who are still enrolled in schools can not opt for consolidation. Students who are married couples cannot avail the loan as joint borrowers.
It is a matter of concern that any loan consolidation treats the symptom and does not touch the root of the problem. However debts are causes for concern. They must be availed sparingly. Once availed, they must be taken seriously and dealt with suitably so as not to lose one?s peace of mind.