When you’re applying for college, you don’t really give a second thought to the amount of loan that you are going to accumulate. That problem is for you to tackle after you have graduated. While it’s very easy to overlook the problem during your college years, it can definitely come back to haunt you after you have graduated and it is a very persistent ghost.
One answer to the current debt crisis faced by students is that of student loan consolidation.
What is Student Loan Consolidation?
A consolidated student loan is a large sum of money borrowed from a lending institution to pay off all previous loans. It takes all the smaller, hard to keep track of loans and combines to them to create one mass amount.
The borrower no longer has to keep track of multiple due dates, interest rates and forgetting to pay off monthly charges. In addition, you will even be paying smaller amounts to the bank every month even if the overall amount is high at the time of maturity.
When consolidating loans, you need to understand the kind of loan that you are considering consolidation for.
Consolidating federal Loans
Federal loans are governed by interest rates which are set by the government. In addition, when you have multiple federal student loans, the interest rate of the consolidated loan will be the average of previous loans that you were previously handling.
Even if you feel that the current rates on your federal loans are high, then you can rest assured that they will never exceed past 8.25%. This number does not fluctuate no matter how the economy is faring.
Aside from a prerequisite to opt for a federal consolidated loan, another benefit of opting for a federal loan consolidation is the flexibility when it comes to credit scores.
Private loan Consolidation
You can receive a consolidated private loan if your previous student loans are of a consolidated nature. Once you consolidate your private loans, you can expect variable interest rates. This means that you need to be smart about the time when you apply for a loan. It’s best to keep an eye on the market and apply when interest rates are low, so you can save thousands of dollars in the long run. This may however also mean that the interest rates may be higher as the years go by resulting in a higher amount.
Consolidating private loans is a much more difficult process. When applying for consolidated student loans you need to make sure that you have spotless credit history and are able to indicate to the lenders that you are a reliable investment.
Chances are that you may still nod up with a consolidated loan but the terms of the consolidation will be extremely unfavorable. You may end up with a much higher interest rate t pay off with higher penalty charges.
Although the choice of loan consolidation is pretty cut and dry when opting between federal and private student debt consolidation its important o know just what kind of situation you are getting into.
Sources
http://studentaid.ed.gov/repay-loans/consolidation
https://www.sofi.com/blog/student-loan-smarts-consolidate-federal-private-loans/
https://financialaid.tamu.edu/types/loans/loan_consolidation.aspx
