As a student, you might have heard about consolidation of the loans you have taken out over the course of your studies. Loan consolidation lets you combine all those different debts into a single loan. Before you decide to consolidate your student loans however, here are a few points to consider.
Loan consolidation means that you combine existing loans, extending the repayment period, usually to between 10 and 30 years. Although a consolidated loan benefits from a fixed interest rate for the term of the loan, the longer repayment term means you will be paying more in the long run.
Student loans consolidation that are available are classified into Federal and Private. A student can consolidate Stafford, PLUS, HEAL, Perkins and Direct Loans, with Federal loan consolidation. Federal student loan consolidation requires no credit checks, and there are no application charges or fees. No co-signer or employment necessary for you to take out this loan.
Prepayment with a Federal student loan consolidation incur no penalties. The borrower can specify, if they pay more than the required monthly amount as prepayment which then accrues directly to the principal loan. This reduces the term of the loan and the amount of interest paid.
The borrower can defer payments if they want to go back to school, under terms defined per the Federal student loan consolidation. Working in federal volunteer programs or teaching in economic development zones, military service and others, can be a basis of application for forgiveness under certain circumstances. Federal consolidated loans are forgiven if the borrower should pass away. They qualify for a 0.6% reduction on the interest rate, if a borrower consolidates their loans during the grace period. However, repayment begins immediately, and the rest of the grace period falls away.
Numerous financial institutions provide private student loan consolidation. Similar benefits to a federal loan consolidation are being offered like reduced monthly repayments with a fixed interest rate for the term of the loan. In addition, private loan consolidation offers a 48 month deferment for medical or dental residents, and a 36 month deferment for all active-duty military personnel.
With private student loan consolidation, however, the borrower will lose many of the benefits of the original loans. Forbearance and forgiveness provisions generally fall away and they do require a co-signer. If a borrower consolidates Federal and Private student loans, they can only qualify for a private consolidated loan. Twenty five years repayment for undergraduate loans are offered by private consolidated loans and up to 30 years for postgraduate loans.
The loss of benefits and discounts offered on the original loans should be heavily considered even if the immediate repayment relief may seem attractive. The extended repayment terms can result in a much higher amount being repaid, for instance, on a consolidated loan of $50,000 over 25 years, the repayments total over $100,000. In comparison, a monthly savings of $101 seem irrelevant. If the borrower has no option but to reduce monthly expenses in order to make ends meet, only then shall student loan consolidation be considered. If the borrower’s original loans were federal loans, then they can qualify for a Federal student loan consolidation which appears to offer more benefits.
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