Loan Consolidation: Manage Student Loans Better for a Better Tomorrow
By Gitanjali Hazarika
In the virtual blitzkrieg of higher education costs, students must compete with one another to secure college scholarships. But not everyone gets scholarships. However, with the backing of the federal government and many student loan companies, loans have made higher education possible for students who miss the scholarship bus.
You don't need a soothsayer to predict that the better you manage your student loan today, the better your financial future will be!
Consolidate Your Loan
Now, how can you do this? Since no one wants his or her credit rating to plummet, determining a good plan-of-action when beginning to repay student loans is prudent. Consolidating existing loans while the interest rates are still low is perhaps the smartest option. Such consolidation loans are available for most federal loans such as FFELP (Stafford, PLUS, and SLS), FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans, and Direct loans. Consolidation loans for private loans are also offered as well. However, there's a catch. Private loans, those that are not federally guaranteed, cannot be consolidated. These lenders only consolidate loans that have balances of at least $7,500.
Repaying Multiple Loans Together
When repaying one or multiple student loans simultaneously, consolidation helps because the original balance is paid in full. In the process, the short-term loans are also extended for 10 years. A new loan for the combined amount and for a new term is created, and all of this is done with a fixed low-interest rate. Consolidation extends the term of your loan repayment beyond the 10-year plan, thereby also reducing the size of your monthly payments. The standard repayment plan for federal loans is 10 years. But, depending on the loan amount, the term of the loan can be extended from 12 to 30 years. The consolidated interest rates' average is calculated in order to determine the weighted, new interest rate. This weighted average is either rounded up to the nearest one-eighth of a percent or capped at 8.25%.
When consolidating loans with varied interest rates, the weighted average interest rate will be the median. But be wary of those who say that this will save you more money than a reduced interest rate. Though the reduced rate might seem better than the highest rate you are paying, remember that it is also higher than your lowest one. Say a student borrows X amount from Stafford Loans at 6.8% interest and also borrows Y amount at 5% interest from Perkins Loans. In such a situation, the loan interest rate calculation will be (X * 6.8%) + (Y * 5%) divided by the sum of the two loan amounts (X+Y). The result will be the weighted average of the sum, which then is rounded up to the nearest one-eighth of a percent. This will result in the exact same consolidation loan interest rate for the borrower's multiple loans.
Consolidation gives you the benefit of locking in a fixed low-interest rate for the life of the loan and having to make only one monthly payment to one lender. The lowered monthly payments may make the loan easier to repay. However, be aware that all interest rates vary depending on the borrower. Therefore, in order to understand your individual rate (which depends on your original loan rates), it's advisable to first check with the lenders to find out how much your rate will decrease.
However, consolidation also increases the total amount of interest paid. To counter that effect, if the monthly repayment is continued as before, the total amount of interest paid will also decrease. There are also added bonuses in lieu of reduced interest rates and payment reductions if monthly payments are made on time or deducted automatically from checking or savings accounts.
If the minor increase in interest rates from consolidation bothers you, there are some other modes of repayment available for federal loans. Alternative options also increase the total amount of interest paid, though the increase is slightly less than that from consolidation. Check out these other options: income-contingent payments (for lower monthly incomes), graduated repayments (lower payments for the first two years after graduation), and extended repayments (extended loan terms without consolidation).
It's your loan, and yes, you will have to repay. So start the process now. This will help you save time for important things like searching for the right break—your first job!
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How EdFed Helped others!
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Education is one of the most basic right of any human, but with the increase in prices and the costs involved in education this has made these rights turn into a privilege which very few can enjoy. Any normal person today in the whole of United States has to take an education loan at one point of time to pay for their education fees.
You have worked hard to get to where you are and deserve to have some fun without being saddled by debt. Federal loan consolidation may provide you with a way to hold onto more of your hard-earned money.