Student Loan Nightmare!

What is student loan consolidation? Find out more about how to lower your monthly payments on your student loans.

What is student loan consolidation? Find out more about how to lower your monthly payments on your student loans.

Types of loans

First you will need to know about the different types of loans that are available. Let’s start with the Federal Perkins Loan. This type of loan is generally granted by the college’s financial aid office. Since this is a need-based loan, the university’s financial aid office must determine who qualifies for the loan and how much they will receive. Universities only have a limited amount of funds to distribute, however, so these loans are awarded on a very selective basis. The majority of college students have Federal Stafford Loans instead. This is the most common loan available to both undergraduate and graduate students. If a Stafford Loan is subsidized, the federal government pays your accrued interest while you’re in school and during the grace period after graduation. If your Stafford is unsubsidized, however, you’ll be footing the entire bill. Lastly, you may have one or several private education loans. There are a variety of lenders that provide private education loans. Most banks and financial institutions offer private student loans to help supplement the costs that other financial aid resources won’t cover.

Consolidating your loans

Now that you better understand what kind of loan(s) you have, you’re probably wondering what’s next. Pay off time! It may sound daunting to have to pay back all of those loans, but don’t even think about attempting to dodge those bills. Not paying your loans back will cause your credit rating to plummet. And remember, declaring bankruptcy is not an option! Student loans are immune to bankruptcy. You may also face IRS penalties and possible garnishment of wages if you hold off on payment—so make those monthly payments on time! So what’s a good plan-of-action when beginning to repay your loans? A smart move is to look into consolidating your existing loans now while interest rates are still low.

What is consolidation?

Consolidation involves refinancing one or more of your student loans. The original balance is paid in full, and a new loan is originated for the combined amount and for a new term—all with a low fixed interest rate. Consolidation loans often reduce the size of your monthly payment by extending the term of your loan beyond the 10-year repayment plan that is standard with federal loans. Depending on the loan amount, the term of the loan can be extended from 12–30 years. The reduced monthly payment may make the loan easier to repay. However, by extending the term of a loan the total amount of interest paid is increased. You can always make more than the minimum payment each month to cut the repayment period down and reduce the amount of interest paid.

Get a head start

Which loans should you consolidate? You can consolidate Perkins, Stafford, and even some previously consolidated loans. Unfortunately, you cannot consolidate private loans that are not federally guaranteed under the federal program. Also, most lenders will only consolidate loans for students with loan balances of at least $7,500. For most of you, this threshold won’t be a problem.

Benefits of consolidating

What are the benefits of consolidating your loan(s)? The main benefit of consolidation is that it allows you to lock in a low fixed interest rate for the life of the loan. Understand though, that not everyone gets the lowest rate on consolidation. While some can lock in a very low rate close to 3.5%, others may pay slightly more depending on the original loan rates. So check with your lenders for information on how much your rate will decrease. Each website has online calculators, and you can even apply for a consolidation loan online. Note also that there is no fee for you, the borrower, to consolidate.

Another benefit to consolidation is that now you only have to make one monthly payment and to only one lender—saving you a headache each month from sorting out to whom and what you owe. There are also added bonuses, for instance, many lenders offer interest rate and payment reductions if you pay on time over a period of months and/or have your monthly payments automatically withdrawn from your checking or savings account.

Do a little homework and in the end you’ll save yourself a nice sum of cash for consolidating your loans. One place to start is, where you can view the benefits of consolidation and apply online. Start the process now, so you can relax, get some sleep and focus on what’s really important, your first real job!

Reprinted with permission from Graduating Engineer & Computer Careers Magazine 

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