Student loans form a significant chunk of the American debt market. In 2017, the total student debt has touched $1.4 trillion covering 44 million borrowers. Student debt is just second to mortgage debts in the category of consumer debt in the US. Education has become so costly nowadays that it is only common to see students availing loans from several borrowers to garner education funds.
Liability for students
Since the number of scholarships and grants are just too few as compared to the aspiring students, taking education loan is the only way to organize finances for studying. The education loan figures demonstrate how insufficient the scholarships and grants are.
Whether easy availability of education loan has pushed up the cost of education or whether the colleges started charging more that prompted the finance market to respond with education loans is a matter of debate that continues unabated. However, students have to bear the brunt of the loan liability that becomes a concern for many as they find it extremely difficult to manage multiple loans. This is why more and more students are turning to student debt consolidation that makes their lives easy.
Consolidating student loans
Bundling several loans into one is the principle behind debt consolidation that seems attractive for those availing student loans, whether federal or private. It is quite common to see students dealing with a dozen lenders with different payment dates every month and devoting considerable time to ensure that they do not miss out of payments.
The task can become quite overwhelming, and besides eating up valuable time of students, it creates a huge distraction that affects studies. Continuing with it for long can ultimately defeat the purpose of taking a loan, which is most undesirable.
To take care of such distressing situations and to enable students to manage loans more efficiently by streamlining payments, consolidating multiple loans by replacing it with a single loan is perhaps the only option. Consolidation leaves you with just a single lender whom you pay every month. Things become just too simple, and loans that seemed to be a menace is now completely under your control. You become more confident in paying loans and do not mind to continue with it.
Types of student loan consolidation
Since students can avail federal loans as well as private loans and consolidation is applicable for both but with marked differences.
Federal student loan consolidation – You must not expect any financial gains from this process. It is primarily a logistical move taken through the department of education. The move enables students to become eligible for federal loan repayment programs.
Private student loan consolidation – The method of consolidation is the same for loans obtained from private lenders, but here students get the opportunity of making financial gains by availing lower interest. However, how much benefit you can get from it depends on your credit score and other factors.
The fundamentals of federal student loan consolidation
To become eligible for federal student loan consolidation, you must be a graduate but if you drop out below half time enrollment or leave school then also you can apply for consolidation. The department of education carries out the consolidation process that does not charge any fees. The government pays off all loans and replaces it with a single loan.
In the process, a new interest rate is applicable on loan, which is slightly higher than the previous interest rate. This happens because the interest rate is calculated based on weighted average of interest rates on earlier loans. The new term of the loan may vary between 10 to 30 years and the repayment starts within 60 days of disbursement of the fresh loan. The tenure of loan depends on the loan amount and some other factors.
Benefits of consolidating federal student loan
When you consolidate federal student loan, the doors open for access to forgiveness programs and repayment plans that you are not entitled to otherwise. Federal loans under the Direct Loan Program allow you to access Pay as you Earn, Income Contingent Repayment, Revised Pay as You Earn and Public Service Loan Forgiveness. When you consolidate loans availed through Federal Family Education Loan Program (FFEL) you qualify to avail the benefits of the program. To become eligible for income contingent repayment, parent borrowers availing Plus and Direct Plus loans must consolidate the loans first.
Recovery from default – If you have a federal student loan that is under default and gets it consolidated you become eligible for federal loan benefits. It includes forbearance, deferment, and programs for loan forgiveness. If recovery from default is the purpose of consolidation, then you have to make three consecutive, full monthly payments before consolidation or choose an income driven repayment plan to become eligible.
Single loan account – Consolidation leaves you to deal with a single lender, and it becomes easy to monitor and make single monthly payments on time.
Consolidating private student loan
Taking a private loan, like the ones available from Nationaldebtrelief.com to replace a federal, private or a hybrid of the two loans, constitutes private student loan consolidation also known as student loan refinancing. During refinancing, factors like education, job history, credit score and income determine the applicable interest rate.
You would be able to avail lower interest if the factors are favorable. The impressive range varies between 2% and 9% or more and the preferred credit score to avail the new loan is in the mid range of 600. If you consolidate federal loan with the private loan, you must forgo the protections associated with federal loans.
On an average, when a student graduates, s/he carries seven loans with three loan servicer companies. Consolidation converts it into a single lender with single monthly payments.
Terry Godier is an experienced and skilled business consultant and Financial advisor in the USA.He helps clients both personal and professional in long-term wealth building plans.During his spare time he loves to write on Business,Finance,Marketing,Social Media.He loves to share his knowledge and Experts tips with his readers.