Student Loan Consolidation

Student Loan Consolidation

Student Loan Consolidation

It’s a common story – young college students who take on thousands of dollars in student loans and spend the money without much thought. Paying back the loans seems to be something to worry about in the future for most students. So they concentrate on their studies and having fun while in college, often spending money freely and enjoying themselves.

The problem for many college students is that in the current job market, securing well paid employment and repaying college loans is not always an easy task. When the loan repayment period begins, many college students still haven’t secured well paid employment so find themselves struggling, and even in some cases defaulting on their college loans and damaging their credit rating.

According to recent figures, nearly two thirds of graduates complete college with student debt, averaging over $20’000 per graduate. That’s not to mention the students who incur a large amount of debt but never finish their degree – the people who do 2 years of a law degree then drop out because of medical or family reasons. They will carry that debt yet have nothing to show for it. In addition, many students obtain college loans from numerous sources, in some cases 3, 4 or 5 loans from the federal government and private sources.

Well luckily there are some solutions for managing student loans and one of those is student loan consolidation. In many cases you can combine your college loans into a single loan and make one repayment on that single loan instead of multiple repayments on many loans. It has numerous advantages, but it may not be for everyone!

One problem that frequently crops up is that federal student loans cannot be consolidated with private loans. So if you have a number of loans from different sources you may be only able to consolidate some of them. Another point to consider is that all federal loans now carry fixed interest rates (since 2006), so consolidation may not necessarily mean you obtain a better interest rate on those loans. You can still obtain the benefit of having a single loan repayment by consolidating fixed interest loans but it may not necessarily save you much if any money.

Another point to consider is that many student loan consolidation plans actually lengthen the repayment period of the loan when the debt is consolidated. So whilst the repayment amounts may be lowered, in the long term you are paying a lot more interest on the loan. Some student loan consolidation plans will extend the loan repayment period by as much as 10 years, so you are creating a more long term debt which will mean many more thousands in interest payments – you might be paying 40% less each month but you could be paying twice as much interest if you double the loan period from 10 to 20 years.

If your government loans were created before 2006 and have a floating interest rate, you may be able to save big now by consolidating because of the historically low interest rates post global financial crisis. However make sure you time it right, in many cases with government loans, you can’t consolidate your loan again if the interest rate goes lower in the future.

New students can also go for a new income based repayment plan which best suits many people who are entering into low income sectors like the public service. Repayments are capped to a certain percentage of your monthly income, which helps you pay down the loan while surviving on what can be a meager income.

The rate is calculated using the gross income figure of the student, then subtracting a living allowance (currently 150% of the federal poverty level), then applying the rate on the remainder of the income. As your salary increases, so does the amount that you can afford to pay. After 25 years the remainder of the debt is forgiven, so if you are unable to obtain a well paying job in the long term, eventually your debt is wiped. It is important to note that you may be able to switch your government loans to this repayment plan now, however you will be starting the 25 year repayment plan from the start date of your new agreement.

Where student loan consolidation can really pay off is when you have multiple private loans. This is particularly true if your credit rating has improved because you may be able to get a consolidation loan that has a much lower interest rate than your current student loans.

You can also take the opportunity to remove any co-signer on the loan – that is useful for students who had a parent co-sign the loan. You will remove any risk to your parent and you will be paying back a loan on your own terms.

There are many companies offering student loan consolidation packages, so it pays to really shop around. All student loan consolidation packages have a cap on the total for the loan. You also have to examine any fees that are associated with obtaining the loan and any repayment penalties. Depending on the loan there might be a maxium interest rate on the loan so that is worth noting. Take care to note the length of the loan and appreciate the fact that it may be longer than your initial student loans. Consider the ramifications to adding 5 or 10 years to the length of the loan – do you want to be paying it off when you are in your 40s?

Make sure you read the fine print of the loan and if there is something you don’t quite understand, ask a question on the student loans forum, ask an experienced relative or speak with a financial consultant.

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One Comment on “Student Loan Consolidation”

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