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Student loan consolidations

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 percent.

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 fluctuating.

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 years.

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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