Is Loan Consolidation The Right Answer?
Most students these days graduate with a hefty debt – an amount which is estimated to be about $22,000 per graduate. While acquiring loans is a relatively simple and easy process, the repayment procedure proves to be the exact contrary. This is one reason why graduating from colleges and universities serves as a massive eye-opener – this marks the payback time!
If you are one of those students struggling with multiple loans and an unstable source of income, you have landed at the right place. There are a number of options you can opt for to make repayment relatively easier and possible. Here is what you can do.
Student Loan Consolidation
In most cases, students are likely to acquire multiple loans during their academic years instead of relying on one. Consequently when it comes to repayment, managing multiple due dates and handing out several checks within one month is outright challenging on its own – and this does not include the pain of parting with your hard earned finances. Student loan consolidation is therefore the most attractive option.
You can use one massive loan to pay off all other debts so you have one due date to remember and one check to sign each month. If you are lucky enough, you will be able to receive this loan at a lower interest rate which translates into savings. However, do remember that once the loans have been consolidated and the new (or fixed) interest rate has been assigned, it will not be able to opt for another consolidation at an even lower interest rate – if it so happens.
Loan Consolidated – Now What?
It doesn’t end with getting your loans consolidated; the next step is to design a scheme to repay this “new” loan. This is where the real test begins.
Most graduates (not all though) are likely to end up unemployed, underemployed or working in a career field that earns brief salaries – for instance, most government employees do not earn big bucks even though there are quite a few fringe benefits attached. So paying hefty sums in debt repayment each month is not as easy as it may sound. In any case, who would want to spend hundreds each month on debt repayment when that could otherwise be used to buy basic necessities?
To further simplify these matters, most debt management companies offer different alternatives to achieve this seemingly impossible feat. These include:
- IBR – Income Based Repayment. This method takes your salary into consideration before computing an amount you should (and you can) reserve for repayment. So as you progress through the career ladder, your proceeds towards the debt will also increase simultaneously.
- PAYE – Pay As You Earn. While IBR compels you to forward 15% of your disposable income (computed as after tax income minus 150% of federal poverty level), the PAYE works around the 10% principle. As much as you would like it, everyone is not eligible for PAYE. So you will need to do some research before deciding which course of action to pursue.
Sources
http://www.investopedia.com/articles/younginvestors/09/consolidate-student-loans.asp
http://www.tuition.io/blog/2014/01/3-differences-between-income-based-repayment-and-pay-as-you-earn/
http://www.forbes.com/2009/04/15/student-loans-moneybuilder-personal-finance-consolidate.html
https://studentaid.ed.gov/repay-loans/consolidation
