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Consolidating and Repaying Loans

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You're graduating from college and entering the real world—soon you'll be raking in the dough, right? Earning a paycheck is definitely exciting, but don't forget about those pesky student loans.

Consolidating and repaying loans

On average, college students graduate with a whopping $20,400 in debt, says Emily Davidson at Credit.com. Consolidating your student loans can be helpful, especially if you have a large balance spread out across multiple lenders. But before you apply to consolidate you loans, make sure you know all your options and the pros and cons of consolidation.

Repaying student loans

The transition from living on a student budget to a real paycheck can be exhilarating at first, but don’t get carried away by those dollar signs and overspend. It’s a good idea to set up a budget that includes student loan repayment, says Katy Maloney, interim Director of Financial Aid at the University of California, Davis.

Maloney is surprised by the number of students unaware of the amount they’ve borrowed by the time they graduate. “The sum can catch some students off guard,” she says, “especially when the first bills start rolling in.”

Maloney advises students to stay on top of bills by knowing how much they owe and to whom and by understanding the different terms of the loans they may be carrying.

Options for repayment

Maloney warns grads from jumping right into consolidation. There are many lenders offering consolidation, but that may not be the right choice for all student loans,” she says. “For example, a Perkins loan may have a lower interest rate than what is offered through consolidation.”

Maloney urges students to look at the interest rates on each loan and do their research before going this route. “Graduates usually have a choice of several repayment plans: the standard 10-year plan; a graduated plan where the borrower pays only interest for a time, then pays increasingly more over the years; and income-contingent plans,” Maloney explains. “You should work with the holder of your loan to determine which plan works best. As life circumstances change, you can reconfigure your payment plan, if necessary.”

Avoid defaulting

Maloney advises graduates to do whatever it takes to avoid defaulting on your student loan. Defaulting can harm your credit rating and ability to obtain aid for grad school—it can also place your school’s ability to secure loans for future students in jeopardy. “Life happens,” Maloney states. “But grads should work with the holder of their loan to obtain a forbearance or deferment before going into default.”

Loan consolidation tips

Life after college is hard enough without having to worry about your debts, and consolidation is one way borrowers can manage their loans. In order to figure out if this is the route for you, Christine Moriarty, president of MoneyPeace, says recent grads need to first collect all their loan information: their debt total, interest rate, monthly payment, and pay-off date. Then they can compare rates. Often, the consolidated interest rates are higher than some of the loans.

“Do not consolidate to a higher interest rate,” she warns. “Only consolidate to one where there will be savings.”

Finally, consider if consolidating your loan is only for convenience—think having one payment. Moriarty says, “In this case, you can often set up one checking account from which the loans are automatically withdrawn each month and you can make one payment to this account. The lender will usually reduce the interest rate for such an arrangement, saving you the hassle of consolidating and often removing any fees or additional interest.”

Pros and cons of consolidation

Consolidation has upsides too, explains Davidson; it can help you lock in a low interest rate.

“Student loan rates are currently at all-time lows, making this the perfect time to consolidate your federal loans,” she explains. “If you consolidate, your new interest rate will be calculated by averaging the rates on your current loans. If you don’t consolidate your loans, your rates could increase in the coming years.” Consolidating your student loans can also help increase your credit score by reducing the number of open accounts on your credit report.

“You can get a better deal on a consolidation loan if you meet certain special requirements,” Davidson says, “such as if you graduate within six months of the consolidation period, and/or if you pay your loan on time consistently.” Of course, Davidson is well versed in the pitfalls of consolidation too.

“Consolidation requirements can be tough,” she says. “Student loan consolidators have a set of strict requirements for potential borrowers. Your current loans must be from select lenders, your total loan amount must exceed $10,000, you must have graduated or left school already, and you must not currently be in default on your loans. “Consolidating can increase the overall cost of your loan. When you consolidate your student loans, the debts are combined into a new loan with a longer repayment term. This new 10-30 year term allows you to reduce the amount you have to pay each month, but increases the long-term interest costs of your debts. If you can afford to pay off your current student loans quickly, it may be a good idea not to consolidate.”

Final word

Consolidation may not be your best option. There are other programs available to help you repay your loans or have them forgiven.

“Government programs exist that help borrowers repay their student loans by doing community service or becoming a teacher in certain areas,” says Davidson. “If you have a Perkins loan, there are opportunities that allow you to have the debt forgiven. It is a good idea to research all your options before you consolidate.” 

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