Paying off for student loans:
Receiving your graduation degree is a matter of pride and happiness, but at
the same time worries about paying off for student
loans start building up. With every graduation season getting
over, nearly 85 percent of the students have the same common
fear about repaying their student loans.
The student loan repayment bills can be very shocking, quite like stepping on a live electric wire. And running away with your student loans doesnt stand a chance, because evading the loan recovery procedure for student loans is tougher than dodging the FBI.
Bankruptcy is also not a solution, because student loans are immune to bankruptcy and you will have to pay off your bills with unbendable penalties. Your sufferings will increase further with the poor credit ratings. Penalties imposed by the IRS and wage garnishment are definitely not the most exciting things to begin your life after college.
To worsen it all, the job market has also turned hostile, leaving students in a miserable situation with low cash on hand to keep up with the monthly payments for student loans. While student loans can be consolidated especially in the light of todays lower interest rates, still it may leave a major lump of your problems unattended. Consolidation allows you to combine most of your student loans into a single loan with a single monthly payment, and this monthly payment is usually much lower because of the extension of the term length of the loan.
However, the downside of student loan consolidation is that while your monthly
payments get lowered, it doesnt imply that you will be paying
less; rather you would be paying much more over the longer term.
The usual payoff term for student loans is ten years, but with
consolidation the term is extended from fifteen to 30 years.
Consequently you will be paying much more money as the total
interest over the loan for the longer term.
For instance, your student loans are to the tune of $15,000, with the average interest rate of eight percent and the payoff time being ten years; then the total amount of money that you will end up paying will be approximately $22,000. On the other hand when you consolidate the bills and extend your loan term to fifteen years the total amount you will have to pay off will be around $26,000, which is a difference of nearly $4,000. Just imagine what all you could have done with that additional $4,000.00, you could have made a down payment for your new car or your new home or even gone ahead with your desired vacation.
Before you go on for consolidation of your student loans, consider the following two repayment options. And later we will give you advice on how to play it safe with the student loan consolidation.
1. Graduated repayment: most students usually land up with low paying entry-level jobs after graduation, but within a few years their income increases as they climb the corporate ladder. With graduated repayment plan, the initial monthly payments soon after graduation are smaller and slowly over the years they increase in their size. While you still continue to pay within the ten years stipulated time, this plan makes it easier to repay because the initial monthly payments are lower. However, the drawback is that you will be paying nearly five percent more amounts than what you would have paid under your normal repayment plan.
2. Income sensitive repayment: quite like graduated repayment, the monthly payments fluctuate with your income. Your monthly payments are determined on the basis of your salary, and it offers you a bit more flexibility than the above mentioned option. However, the sad part is that your loan term gets stretched to fifteen years which will mean more interest to be paid over the loan.
Apart from alterations in the repayment plan, the cost of your loan may come down because of this special incentive programs that most lenders offer such as reductions in the interest rate if your regular with your payments or because you sign up for an automatic debit option.
Spotting shams in a student loan consolidation:
When youre about to finish graduation or you have recently finished college, you will receive a lot of tempting offers from lenders who offer student loan consolidation. The advantages that are generally shown associated with student loan consolidation are:
1. It is a loan with a fixed rate of interest.
2. When youre facing difficulty with handling multiple student loans, combining them into one loan with a single lender will make things much easier.
3. The monthly payments can be reduced by more than 50 percent by extending the payoff time.
What is important for you to learn at the time of consolidation of your student loans is the kind of benefits that the lender is ready to offer you. Sadly, while most of these flyers that you will receive from the lenders promise a lot of things, but alongside you will find the fine prints where the lender has all the rights to make changes and withdraw the benefits at any time. So those tempting promises are nothing more than shams.
The fine prints are usually glossed over or obscured in the details of your loan consolidation. These are usually misleading and will eventually result in higher costs for you. Here are some of these shams:
• Discounts: most of the times you are told that if you continue making regular payments for the initial few years your interest rate will drop, but even if you are late with a single payment after this drop the discount will be completely eliminated. Check out the clause governing this discount to see if it is a permanent benefit or not, once you qualify for it.
• All in one consolidation: some lenders allow you to put together all the different types of your debts into a single loan, which again can be very deceptive. Although its quite tempting to have a single monthly payment, but consolidating your Federal student loans with other types of debts will cause you to lose the several unique benefits associated with the Federal student loan. Federal student loans have an interest cap of 8.25 percent, and additionally there are provisions for deferment and forbearance. With the consolidation the lender may charge you an interest rate which is above 8.25 percent, and at the same time you will lose the option of deferment and forbearance.
• Automatic debit: while the lender will extend you a discount to sign
up for an automatic debit option, but if your account does not
have the necessity funds you will face heavy penalties. The
automatic debit option can also not be stopped instantly as
it usually takes more than ten business days.
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