Definition of student loan consolidation

What is student loan consolidation?

Student loan consolidation is a process by which you take out a new loan, which is then used to pay off your other existing student loans. Instead of having multiple loans and loan repayments, you only have one. You can consolidate all federal student loans and most private student loans.

The amount of money you are allowed to borrow depends on your college expenses for a given year. If you graduate in four years, you will likely have four loans, or even more if you have also taken out a private loan for additional funds.

Loan consolidation may just change your life, but you need to do it carefully to avoid losing any benefits you may currently have (or may be entitled to) under the loans you currently have. But first you need to make sure that you are eligible for consolidation. Only then will you begin to research the best loan options available to you.

Student Loan Debt: Is Consolidation The Answer?

Eligibility Requirements for Student Loan Consolidation

In most cases, you are considered eligible for consolidation of your loans if you are:

  • Not currently in school or enrolled in less than part-time status
  • Are currently making loan payments or are in the loan grace period
  • Have a good repayment history (which means you are not in default on your loans)
  • Have at least $ 5,000 to $ 7,500 in loans

While you don’t need to meet a minimum to combine debts under the Federal Direct Consolidation Loan Program, private lenders and loan companies tend to require a minimum loan balance. You cannot consolidate private student loans with federal student loans, and you can only consolidate loans that you hold in your name; this means that you cannot consolidate your own loans with those of your spouse or with loans that your parents may have taken out to finance your college education.

Pros and Cons of Student Loan Consolidation

While the consolidation process makes your life easier and helps you make sure you’re up to date with your loan payments, there are some negatives that you need to consider.

  • Simplify your bill payment process

  • Extension of your repayment term

  • Lower your interest rate

  • Switch from a variable rate loan to a fixed rate loan

  • Lower the amount of the monthly payment

  • Sign up for another repayment plan

  • Gradual repayment (monthly payments start low, then increase)

  • Income-based refund (monthly payments are a percentage of pre-tax income

  • Obtain borrower benefits

The inconvenients
  • Pay more in total interest

  • Have a larger total loan repayment amount

  • Be in debt longer (if you extend the term of your loan)

  • The losing borrower benefits from your current lender (ie.

  • Duty to repay borrower benefits (i.e. discounts, fee waivers)

  • Possible early repayment penalties

  • Loss of grace period on original loans, if applicable

  • If you consolidate a mix of federal and private loans, you lose the protections offered by federal student loans.

Benefits of consolidation

Note that some consolidation pros only apply to federal loans or only to private loans. This is one of the reasons why, if you have both types of loans, you might want to bundle them separately (see below). Also: You can also always keep a single loan separate which has particularly attractive advantages for the borrower.

Applies to all loans

Simplify the process of paying your invoices: With one loan, you only have one repayment deadline to remember and one check to write.

Extension of your repayment term: With a new loan, you can extend the repayment term, often between 12 and 30 years (instead of 10 years).

Lower the amount of the monthly payment: Extending the term of your loan means you will pay less each month.

Benefit from borrower advantages: Lenders often offer loan holders certain perks (discounts for automatic payments, on-time payment history, etc.) to be a good borrower. If your lender does not provide any benefit, you may want to consider consolidating your loans with a lender who does.

If you consolidate a mix of federal and private loans, you lose the protections offered by federal student loans.

Just for private loans

Lower your interest rate: If you have one or more private student loans and have improved your credit score since obtaining your loan, you may qualify for a consolidated loan with a lower interest rate.

Switching from a variable rate loan to a fixed rate loan: If you have private student loans at different variable interest rates, you may be able to consolidate and get a new loan with a fixed interest rate, which is good if the rates have dropped significantly since you started out. school.

Just for federal loans

Subscribe to another repayment plan: Consolidation can make you eligible for federal loan programs that make it easier to repay your loans.

  • Progressive reimbursement allows you to start payments at a lower monthly amount and then gradually increase that repayment amount every two years.
  • Income Based Refund, which calculates your monthly payment amount as a percentage of your monthly pre-tax income.

Disadvantages of consolidation

The disadvantages of consolidating your student loans apply to all types of loans.

Pay more in total interest: This is because you will be starting the loan repayment clock all over again and it will probably be for a longer period. Therefore, even if your interest rate is the same or lower, you will likely end up paying more interest.

Have a larger total loan repayment amount: More interest means that your total loan repayment is likely to be higher.

Be in debt longer (if you extend the term of your loan): As discussed above.

Losing borrowers benefit from your current lender (i.e. interest rate discount, rebate): If the benefits are really great for a particular loan, you don’t have to include it in the consolidation.

Must repay borrower benefits (i.e. discounts, fee waivers): Factor in these items, if any, into the total cost of your consolidation loan before you decide to consolidate and which loans to include in the mix.

Possible early repayment penalties: Keep them in mind when planning your loan consolidation.

Loss of grace period on original loans, if applicable: Student loans often have a grace period after graduation before they have to start repayments. Your consolidation loan probably won’t have this.

If you consolidate a mix of federal and private loans, you lose the protections offered by federal student loans: Investigate the Federal Direct consolidation loan program to consolidate your federal loans.

Do the loan consolidation calculation

You should be wary if a private lender promises to significantly reduce your interest rate by consolidating your federal student loans. The truth is, lenders weight the average of the interest rates you currently pay on your existing federal student loans, then round that number to the nearest eighth of a percentage.

While the interest rate on the new loan may be lower than the higher interest rate, it will also be higher than the lower interest rate you are currently paying. So overall, you will be paying roughly the same amount or maybe just a little more for your new consolidated loan.

here is an example

Marisa pays 3.6% on a $ 3,500 Stafford loan and 6.8% on a $ 6,500 Stafford loan. If it were to consolidate these loans, a legitimate lender would calculate its new interest rate using the following formula: ($ 3,500 x 3.6%) + ($ 6,500 x 6.8%) / (3 $ 500 + $ 6,500) = 5.68%. This would be rounded to 5.75%. While the overall interest rate on the consolidated loan is less than the 6.8% that Marisa was paying on the $ 6,500 loan, it is significantly more than the 3.6% that she was paying on the 3 loan. $ 500.

Best policy: Before consolidating your student loans, calculate the numbers. Consider how long it will take to pay off the new loan and the total amount of interest you will need to pay as a result. Compare that to the benefits of a lower interest rate, lower monthly payments, and just one student loan payment, not multiple, to manage each month.

Word of Caution Regarding Loan Consolidation: Don’t Mix Federal and Private Loans

As mentioned earlier, if you have both Federal Student Loans and Private Student Loans, you need to consolidate them separately, not together.

Private student loans lack some protections. Combining them with federal loans will prevent you from claiming the benefits provided for federal student loans, such as extended loan repayment periods, income-driven repayment plans, and federal loan cancellation programs.

That would give you two loan payments per month, which is even easier than four or five or more of them. And that’s before going to college …

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