Is Student Loan Consolidation Right For You?
Graduating college is one of the happiest moments of your life – only marred by the creeping reality of what life beyond the college borders will be like. As you proudly hold your degree and bid happy farewells to the zillion college mates who made life amazingly beautiful, your debt and repayment schedule is possibly the last thing on your mind. But not for long!
As the grace period for repayments – the time allowed for you to catch your breath and get a job – approaches its end, the terror of actually parting with your hard earned finances looms into view. And with it comes the challenge of juggling multiple debts, varying interest rates and different due dates. And that is just the beginning!
Your payments primarily pay off the interest accrued – so the principal stays intact to accumulate more interest. As the situation goes helplessly out of your control, student loan consolidation comes as a massive relief!
Student Loan Consolidation
You get one loan on a fixed interest rate (often lower than the aggregate of your individual loans) to pay off all others. This is usually done with the help of loan servicers. With one loan to look after, here are some of the repayment plans you will be presented with.
1. IBR
You will need to pay 15% of your discretionary income (the difference between your gross and 150% of poverty guideline) for a period of up to 25 years. Once this period is over, any debt that is still outstanding will be forgiven.
2. PAYE
You will need to pay 10% of your discretionary income (same as above) for a period of 20 years. After this time period has elapsed, any debt outstanding will be forgiven. It definitely sounds more lucrative than IBR; however, all debts are not covered under PAYE. You will be left with a few unconsolidated debts to look after despite PAYE.
3. Graduated Repayment Plan
After every two years, the repayment plan will be revised. The new payment plan will have larger payments than before. It usually aligned with your career progress. The total duration of payment is limited to 10 years.
4. Extended Repayment Plan
In this repayment plan, the duration of repayment is extended up to 25 years. So you need to pay smaller monthly payments for an “extended” time period. It is an immense relief if you are going through temporary financial hardship.
5. Standard Repayment Plan
This is the plan you signed on before you took the loan. You’ll be required to make a fixed payment each month for a period of 10 years. This scheme incurs the least amount of interest as compared with all other alternatives. Nevertheless, it is extremely challenging to keep up with this plan as it gouges a significant portion of your earnings each month – precisely the reason why other repayment plans were built!
Each method has its pros and cons. Make sure you have researched your options thoroughly before settling for a particular one. And once you have, stick to it! It is the only thing that can help you overcome debt!
References
http://www.tuition.io/blog/2014/01/3-differences-between-income-based-repayment-and-pay-as-you-earn/
https://studentaid.ed.gov/repay-loans/understand/plans
https://studentaid.ed.gov/repay-loans/consolidation
