Understanding Student Loan Consolidation

An estimate shows that approximately half of the college students in the US graduate with debt, keeping in mind that tuition at some of the most esteemed universities can be as much as $50,000 and that the cost of a two-year degree at community colleges can amount to over $15,000. That being said, college debt can be quite a headache for many.

Some people acquire more than one loan during the course of their study, and for reasons which we will discuss later on, it seems wise to consolidate these loans to make them easier to manage.

How Student Loan Consolidation Works

The majority of people have gained insight of loan consolidation because of the numerous Federal programs that are available. They assume that private loan consolidation works in the same way. However, there is a major difference in the two. A private loan consolidation is typically provided by a bank or a credit union.

If you qualify for a student loan consolidation, you will be issued a new loan which will pay off all your previous loans that you may have acquired during the course of your college studies. The interest rates on your new loan will vary depending on your credit history as well as debt-to-income ratio, besides numerous other factors.

Remember that some of the consolidation programs offer loans on fixed as well as variable rates. As far as variable rates are concerned, any changes in the economy will affect the rates so they may increase or decrease in the future.

Who Should Consolidate Loans?

Private student loan consolidation programs are ideal for those people who have a sound credit rating along with large loans and they wish to reduce their monthly payment. It is also suitable for people who are paying off loans to various financial institutions.

People considering student loan consolidation should keep in mind that by lowering the monthly payment and by extending the loan tenure, they will actually be increasing the amount of interest.

Who Should Not Consolidate Loans?

If a person is only managing loans from the same financial institution without any challenges, then it would be pointless for them to consolidate their loans. A new, consolidated loan will typically be paid over a period of between 15 to 25 years. The amount of interest paid during this tenure will be far greater than the original loans in such a case.

Who Should Steer Clear of Loan Consolidation?

When it comes to private student loan consolidation, those people who have poor credit rating along with a low income and have had difficulties in paying off private as well as Federal loans should avoid loan consolidation as the chances of them not qualifying can be enormous.

Advantages of Student Loan Consolidation

• It gives an opportunity for bringing down the monthly payments
• It consolidates all the loans into a single payment
• There are no prepayment penalties involved

All in all, student loan consolidation is a great way to start afresh and allows graduates to manage their finances from the scratch.

Sources

http://money.howstuffworks.com/personal-finance/college-planning/financial-aid/student-loan-consolidation.htm
http://www.investopedia.com/university/student-loans/student-loans8.asp