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Is consolidating student loan beneficial

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By: ruthgibson
on 24th Jul,2013

It has become more of a compulsion to take out a loan for seeking admission in college.
Is consolidating student loan beneficial


It has become more of a compulsion to take out a loan for seeking admission in college. The fees and interest rates are so high that it becomes really difficult to pay off your debt as per the schedule. Student loans are generally available in two types, federal loans and private loans. Federal loans are regulated by federal government and private loans, which is also referred as “alternative loans”, are offered by private lenders. The benefits and protection that’s available in federal loans are not included in private loans.


Consolidating your loan is like getting a new loan to repay old ones. You pay on the consolidated loan instead of paying on different loans. Loan consolidation will simplify your monthly payments by centralizing all your loans into one single payment, wherein you can also switch your variable interest rate loans to a fixed rate.


You can consolidate most of the federal student loans like PLUS Loans, Perkins Loans, Subsidized and Unsubsidized Stafford Loans, Federal Nursing Loans, Health Education Assistance loans, etc. If you’re in default on your student loans, you’ll not be able to take out another loan to go back to school and then you might have to face severe collection procedures. If you choose to consolidate your loans, it can give you a fresh start.


However, private loans are not eligible for consolidation into a Direct Consolidation Loan. It’s advisable not to consolidate federal loans into private loan. There are few protections for borrowers in federal loans like interest rate discounts, principal rebates, or some loan cancellation benefits, which you might just lose if you consolidate federal loans with a private lender. It’s important to check keenly the pros and cons of consolidation before making any decision.


You need to have at least one Direct Loan, that should be in a grace period or already in repayment for qualifying for Direct Consolidation Loan. You can start repayment of Direct Consolidation Loan, 60 days after the loans are disbursed. The repayment period depends upon the amount of your consolidation loan, your other education loan debt and the repayment plan you select. However, it generally ranges from 10 to 30 years. You can select your repayment plan accounting to your requirements and discuss the options with your loan service provider. It’s better to consider whether you need to consolidate your loan at all. Review the following steps to consider whether it’s the best option for you.


a. Firstly, you should check your current student loan account online and review your loan documents. After that you should contact your lender or loan. To know about your loan service provider, you can check www.nslds.ed.gov.


b. You must, then, check how much you are paying every month. You can check that online or call your loan servicer.


c. You should calculate your average interest rate and your monthly loan payments if you consolidate your loans. You can use the DIrect Loan Consolidation online calculator or contact the Direct Loan Consolidation to get these details.


d. You can compare your current monthly payment amount to what it would be after consolidation. You should review if consolidating your student loan will decrease your monthly payment amount and how long would it take to repay the loan.


If you wish to lower down your monthly payments but rethinking about the impacts of loan consolidation, you can reevaluate your budget and incomes. You can also consider forbearance for short term payment relief needs.


However, consolidation of your loan can lead to potential disadvantages like:


a. You might have to pay more in total interest.


b. You might extend your loan period, that means you’ll be paying for a longer period.


c. You might have a larger total repayment amount.


d. You can lose borrower benefits from your current lender.


e.  You can suffer loss of grace period.


There are many unscrupulous lenders who offer to consolidate student loans. You should be aware and shop around while choosing a lender. They might offer you unrealistic lower interest rates which will sound attractive. It’s important to be careful because they might be deceptive and cheat on you. There are a number of factors you must consider before deciding on consolidating your student loan. Consolidation might provide convenience and a number of benefits for a person with many student loans but it can also charge higher interest rates.

 

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