Student loans can be a burden on any household. Anyone with several outstanding student loans, with individual payments to each loan provider, should consider consolidating their student loans if they have trouble meeting each payment. Here are a few important things to know about consolidating your student loans.
Features
Student loans are used by many to offset the expenses of education and the cost of living during education. They often supplement grants or scholarships and are provided either through the government, the school, private banks, or a combination of the three. These loans often have lower interest rates than simple personal loans and are usually set up to be paid after a student leaves or graduates from school. Students who rely heavily on student loans to finance their education can be left with a large debt burden at the end of their educational time.
Function
The purpose of a student loan consolidation is to bring all the loans together under one company. This is done by financing the amount you need to pay all of your student loans. The consolidator then pays the accounts you have with other lenders and creates a repayment plan and interest rate based on the new amount you owe. For example, if a student had four student loans, each with a different lender, and he chose lender A to be his consolidator, then lender A would pay the amount due to B, C and D, and the student would make payments on the larger sum only to lender A.
Types
Loan consolidation is available through both public and private sources. A company that already holds a student loan may be interested in financing the consolidation, since it will result in more interest earned for their company. However, consolidation interest rates may not be as low when using a private lender to consolidate. If you have any government loans (subsidized or unsubsidized Stafford, Perkins, or PLUS loans) you are eligible for the Direct Loan Consolidation program through the federal government. This program is backed by the government and performs the same service, but often at lower interest rates and with more options for repayment. Repayment plans for both private and public consolidation can vary, with options like graduated repayment (gradually paying a larger amount each month), standard repayment (a fixed payment each month) and income contingent repayment (where payments are calculated based on your income and debt ratio).
Considerations
Loan consolidation may not be right for everyone. Here are a few things to look at before considering consolidation:
– How many student loans do you have? If you are only paying two or three separate monthly payments, you may not want to consolidate. If you have several loans and have trouble keeping the payments correct and on time, consolidation may be the best option.
– What is your credit score? A consolidation loan, like any loan, requires consideration of your credit rating and income history. However, consolidation programs through the government are more flexible when reviewing your credit.
– What is your debt-to-income ratio? A balanced and realistic personal budget is essential when considering any type of loan, especially consolidation loans. Considering all your other payments against your income will help determine how much you can afford to pay monthly on a consolidation loan.
Also, note that consolidation loans, like student loans, can be deferred or put into forbearance if they are government-sponsored. Check with the private lenders to see if they offer the same terms and options for repayment.
– How many student loans do you have? If you are only paying two or three separate monthly payments, you may not want to consolidate. If you have several loans and have trouble keeping the payments correct and on time, consolidation may be the best option.
– What is your credit score? A consolidation loan, like any loan, requires consideration of your credit rating and income history. However, consolidation programs through the government are more flexible when reviewing your credit.
– What is your debt-to-income ratio? A balanced and realistic personal budget is essential when considering any type of loan, especially consolidation loans. Considering all your other payments against your income will help determine how much you can afford to pay monthly on a consolidation loan.
Also, note that consolidation loans, like student loans, can be deferred or put into forbearance if they are government-sponsored. Check with the private lenders to see if they offer the same terms and options for repayment.
Benefits
Consolidating your student loans can provide financial relief to stressed households by reducing the number of monthly payments, the total amount paid, and the risk of delinquent payments or default. If a student has graduated and is searching for a job, consolidation can ease the burden of paying debt without stable income. Student loan consolidation can also help prevent negative credit reporting and bankruptcy filings.
