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Is A Student Consolidation Loan Right For You
from: Kyle BesserApplying for a federal student consolidation loan actually is applying for a new loan to pay off your existing eligible student loans. Historically, borrowers would consolidate student loans if they had many different student loans with many different lenders or loan holders. In these situations, student loan consolidation helped simplify the repayment process. Instead of sending loan payments to multiple places, the borrower could make one payment to one lender.
More recently, with historically low interest rates borrowers should carefully consider whether federal consolidation loans are the way to go. This type of loan has several new terms and conditions, such as a fixed interest rate based on the weighted average of all loans being consolidated.
As with most things in life, consolidation choices aren't black or white. For some people it may be a great idea. For others, it would not be so great. It's an individual decision that you'll want to think about carefully and research thoroughly since it has long-term implications.
Student loan consolidation isn't a one-size-fits-all option. There are lots of things to think about and consider before jumping into student loan consolidation. Don't feel rushed into anything! You can always consolidate, but you may feel the pressure to lock into today's lower interest rates.
Here are some tips and considerations before you decide if student loan consolidation is right or wrong for you.
1. How student loan consolidation works
Your student loans are paid off by the consolidating lender. A new loan that consolidates all of your individual student loans is issued. You receive a new repayment schedule based on the size of your direct education loan debt, the direct education loan interest rate and the direct education loan repayment plan chosen. Your student loan consolidation interest rate is based on the weighted average of the student loans you are consolidating rounded up to 1/8 of a percent.
2. Interest Rates for student consolidation loans
If you consolidate your loans, you'll be locking in a fixed interest rate for the life of the student consolidation loan. While a low-fixed interest rate may be a compelling reason to consolidate your loans, this may not hold true for all your loans.
3. Loan Forgiveness Options
Some students can qualify for education loan forgiveness for some if not all of their loan. A great example of this is the federal Perkins Loan program that offers education loan forgiveness for working in certain fields after graduation. If you go into social work, nursing or another qualified field, you may be able to get part or all education loan forgiveness of your Perkins Loan. Also, federal Stafford Loans have an education loan forgiveness plan for teaching in a shortage area. Check out www.studentaid.ed.gov for a complete list of qualifications for education loan forgiveness.
Remember that a Federal Consolidation Loan is a new loan. If you consolidate your federal Perkins Loan and later qualify for education loan forgiveness, you won't be able to get it. The federal Perkins Loan will no longer exist since it was paid off by the education consolidation loan, and the education consolidation loan doesn't have education loan forgiveness provisions!
A better option is to not consolidate loans with education loan forgiveness provisions. Federal Perkins Loans already have a 5% fixed interest rate, so it's not going to rise. In the future, if you don't qualify for education loan forgiveness on the Federal Perkins Loans, or still have a balance on the Federal Perkins Loans remaining after maximum education loan forgiveness, you can reconsolidate your Federal Perkins Loans with the existing Federal Consolidation Loan.
4. Repayment Terms
One thing that borrowers notice after federal education loan consolidation is that the payment amount drops considerably. Many assume that the payment amount has dropped because the interest rate is lower but that's not the only reason. The education loan repayment amount typically drops because the education loan repayment term on the federal consolidation loan usually has been extended.
Since you may be going from a 10-year education loan repayment period to a 12-, 15-, 20- or even a 30-year education loan repayment period, you can anticipate a big reduction in your month-to-month payment. Federal education loan consolidation may be a good thing, especially for borrowers who are looking at fairly high payments for a 10-year period.
Simply by consolidating through federal education loan consolidation, you lengthen the term and lower your payments. For some people, federal education loan consolidation makes their student loan payments affordable rather than a burden. However, since you are stretching out the term, you'll pay more in interest for your loan in the long run.
Federal Consolidation Loans don't carry a prepayment penalty. If the program offers you a lower fixed rate, you could pay off your loan in 15 years rather than 30 and avoid the interest costs that would come with a 30 year education loan repayment period.
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