Higher education does not come cheap. Many parents have to take out loans in order to manage tuition and upkeep expenses for their children. Higher learning student funding is available in two main categories, Federal and Private Loans. So what about student loan consolidation?
Federal Student Aid programs are the biggest source of financial aid for students, offering billions of dollars annually under different programs. Private lending institutions such as banks, on the other hand, offer private loans that are also called alternative loans to borrowers.
Typically, it is advisable for a student to research thoroughly and compare terms and rates across the board, before taking out any loan. This is a smart way to avoid high interest rates, stringent repayment terms and future prospects of debt. However, if you already owe the government or private institutions some money, the simplest method to make payments is by student loan consolidation.
How To Consolidate Student Loans
This is the most common query among students wishing to repay financial assistance granted for their studies. Many students find themselves graduating from College knee deep in debt. In fact, two out of three undergraduate students come out of college with some form of debt according to a 2016 study by the US College Board.
The most affected are the ones who obtain credit from different sources. After graduation, the reality of due dates and interest rates can hit you hard, especially if you are yet to secure decent employment so in a way you could say that the student is the slave to the lender. Nonetheless, student loans consolidation programs make life simpler for fresh graduates.
Consolidating student loans entails grouping together of loans into one, with a view to stretching out the repayment period and lowering overall interest rates. However, you cannot consolidate federal and private loans into one. Federal consolidation of student loans is only possible with individual federal loans such as US Department of Education Direct Loans, Federal Family Education Loans, Federal Perkins Loans, and similar ones.
These options for funding usually come with lower interest rates and opportunities for forgiveness and cancellation. Private loan consolidation, on the other hand, is similar to replacing one loan with another. Depending on your credit score after leaving college, you may be able to receive lower interest rates from lenders to consolidate private student loans.
Federal Loan Consolidation
You can consolidate federal student loans into one big package, making it simpler and cheaper to settle one monthly installment instead of multiple small ones. So what’s your lucky hat? Federal consolidation loans are available from the US Department of Education.
As from January 2012, borrowers will have two options for federal loan consolidation from this department. They include traditional direct consolidation loans and special direct consolidation loans.
Direct Loan Consolidation
This loan allows borrowers to combine their federal student loans into one package with single monthly payments for up to thirty years. So make sure you budgeted your student life orderly. The repayment method has several pros and cons for the borrower. Its benefits to the student include:
- Lower monthly payments over a long period
- The possibility of forbearance, deferment or cancellation under special circumstances
- Special repayment plans depending on personal circumstances
- Free application and processing fees
- Fixed Interest rate on the loan
Drawbacks of Federal Loan Consolidation
- Extended repayment period means that you will eventually pay more for the loan.
- You pay more interest on the loan; sometimes even double the initial offers for individual loans.
- Loss of benefits such as interest rate discounts, principal rebates and loan cancellation benefits, which might have come with the individual loans.
Generally, you can consolidate federal student loans immediately after leaving school. You must also have at least one Direct Loan or FFEL, in grace or repayment status. You must also arrange to settle defaulted credit satisfactory with loan servicers, before consolidating them. It is difficult to consolidate an existing consolidated loan unless it is an FFEL under special circumstances only.
Special Direct Consolidation Loans
This loan will be available from the Department of Education. In order to qualify, you must have at least one FFEL from the department and another one from private lenders. The purpose of special direct consolidation is to combine federal loans under one entity for better servicing. Some of the benefits of this loan include:
- Reduction of the interest rate.
- Repayment period does not change hence lower interest charges with time compared to traditional loans.
- Income-based repayments make you eligible for loan balance cancellation on your commercial FFEL.
- You are also eligible for loan forgiveness under the public service loan forgiveness program.
Nonetheless, each commercial FFEL retains its repayment period even under special consolidation.
Private Student Loan Consolidation
There are several options for consolidating private student loans available for borrowers. Especially when you have completed an environment-related study, forgiveness and consolidation requirements could be lenient. As mentioned earlier on, private consolidation student loans are akin to replacing one loan with another. The main benefit is having a single monthly payment, possibly with a lower interest value with time.
Your FICO credit score and personal appeal determine the interest rate charged on this loan. These loans tend to have similar interest rates as home equity loans. Hence, if your student loan has variable interest rates, you might consider using the fixed rates on your home equity to lock in the rates.