Student Loan Consolidation: the Five important issues.
With the educational costs going beyond the affordability level
for most students, they are forced to pick up several debts
to complete their education. Getting student loan consolidations
to complete the college degree is not a problem, with several
student loan options coming from the Federal government as well
as private lenders. But the problem begins as repayment period
approaches and to worsen it the initial income for most graduates
is usually low.
When repayment seems to be a problem, student
loan consolidations offers a viable solution. With consolidation
come great advantages like smaller monthly payments, reduced
rate of interest and so on. The total amount of loan remains
the same even after consolidation but the term of the loan can
be extended to arrive at reduced monthly payments which are
more affordable. In some cases even a 50 percent reduction in
the monthly payments is quite possible.
Here we will shed light on five of the important issues related
to student loan consolidations.
1. The process of consolidation.
Just like any other consolidation program, student loan consolidation
is carried out by taking a consolidation loan from a single
lender for an amount equal to the total outstanding balances
of all the debts that were picked up by the student for his
education. This new bigger loan is used to pay off all those
earlier debts. As far as the terms and conditions and that the
payment plans are concerned, these vary from lender to lender.
The new loan can be extended for a longer term, than the usual
term of ten years associated with most student loans, so that
the monthly payments come down to a level which will be easier
for the students to manage. The maximum term length for a consolidated
student loan is 30 years, and by shifting on to such a long
term the monthly payments can come down by nearly 60 percent.
In the simplest of words, student
loan consolidations is done by putting together all the
different loans from different lenders and replacing it with
a single loan from a single lender.
2. Reasons to support:
Consolidation seems to be a sensible decision when we take a
look at some of the great benefits that arise due to this. Listed
here are three major benefits:
* Repayment becomes easier: at the time of
consolidation a student can make a choice about the kind of
repayment plan that suits him best. For instance by taking a
consolidated loan for a longer term he can reduce the monthly
payments in accordance with his proposed initial income after
graduation. Some consolidation programs provide the student
with the flexibility to skip out on monthly payments for those
months when his income is not enough. Initially after graduation
most students want the monthly payments to be low but once their
income rises they may want to pay off the loan at a faster rate
to save on the money that will goes in as interest, and this
can easily be done because no prepayment penalties can be imposed
on consolidated student loans.
* Convenience: when a student has too many
debts to manage it can be a real problem. He
will have to write multiple checks each month and ensure that
the monthly payment for each debt is done within time. This
is not only inconvenient but the possibility of errors also
rises, which can at times mean a lot of unnecessary trouble
or financial penalties.
* Savings: some savings can also be made if
the student has picked up some of those expensive debts as such
as credit card balance, which usually entail a very high rate
of interest, as these can also be clubbed up into the consolidated
loan to enjoy a much reduced rate of interest.
3. Reasons against consolidation.
The lenders have a general tendency to support consolidation
loans by speaking highly about them for the plain and simple
reason that they will earn in the process, by charging the student
a huge amount of consolidation fees. In spite of several regulations
governing student loan consolidation, you will still find that
the principal amount has increased because certain fees and
charges had been added by the lender. To check how much fee
is being imposed by the lender, ask him the total amount of
fee that is applicable by pretending that you want to pay it
up front. This is one way to make him declare openly the total
charges he is about to add to your loan amount.
When you consolidate to extend the term of the loan, you will
end up paying much more amount of interest on the loan over
the complete term. So the more you stretch the term the more
will be the total interest.
4. The opportune time.
Ideally the student loan consolidation should take place in
the last one month of the six month grace period following graduation.
If you consolidate before that you will lose out on the grace
period and will have to begin repaying too early, on the other
hand consolidating after the expiry of grace period entails
a higher rate of interest.
Another point to observe is that the interest rates at the time
of consolidation should not be higher than the initial rate
of interest on your student loan.
5. The interest rate.
The interest rate for the student
loan consolidations is calculated as the weighted average
of all the interest rates which were applicable on all your
student debts. The final rate of interest that will apply will
be 1/8 of a percent higher than the weighted average. At present
the interest rates on consolidated loans are capped at 8.25
If you feel that the high rate of interest does not make sense
then consider the fact that it is a fixed rate of interest,
as against the government rates on student loans which keep
Further deductions in the rate of interest are also possible
if you apply for the automatic debit option and also when you
remain consistent with your monthly payments for more than two
Towards the end, we will just emphasize that while there are
several advantages of getting your student loans consolidated,
you must still analyze your personal situation in the light
of the positive and the negative effects of consolidation, and
proceed further only if youre convinced with the idea.
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