Student Loan Consolidation
What to consider and what to ignore when you one is considering consolidating a student loan Before that one must know where do college student loans come from
The issuance of student loans, such as Stafford Student Loans and PLUS loans, is done through one of the two Federally Approved Programs. These two programs are: Federal Direct Loan Program and Federal Family Education Loan (FFEL) program. It is up to college and universities to decide which program will they participate in. there is a basic difference between these two programs. In case of Federal Direct Loan Program, the loan comes directly from the government. In case of FFEL loans, third-party private lenders participating in this federal program originate the loan.
Federal Government is responsible for setting the ceiling on rates for both these programs. For students who take loan through the FFEL program, which happen to be the course more commonly followed by the students, a lot of other terms of the loan can vary from lender to lender. Just to understand how terms can vary in case of a loan through FFEL program, lets take an example. FFEL loans have a 1% default-aversion fee. If you will shop around, you will find that while some lenders are ready to absorb this cost, others are going to pass it on to the borrowers. Similarly, take the case of origination fees, which is to be phased out by 2010, by the way. Some lenders are ready to pay this fee, others are not. All these fine details about the loan terms may be buried somewhere deep in the loan documents. So how to be absolutely sure about all these terms and conditions Answer is simple ask upfront! Before taking a loan, be it a student loan or for that matter any other loan, you need to be absolutely sure what all fees you will be responsible for paying. Any ambiguity regarding loan terms result in nothing but confusion later.
Consolidating a student loan and its benefits.
Now let us talk about student loan consolidation. First of all, you should be absolutely clear what is meant by the term consolidation loan. A consolidation loan is a product offered by the lenders which enables those students, who have two or more than two student loans, to combine these loans into one loan. That doesnt mean that if a student has just one loan, he/she has no option but to repay the loan according to the original terms and conditions. Those with just one loan have the option of getting their loans refinanced. However, presently we will be focusing our attention on consolidating two or more than two loans.
When you consolidate your student loan, the lending institution will pay-off all your existing balances and these balances will be replaced by a single, new, consolidated loan. One very obvious benefit of student loan consolidation is that college graduates with multiple student loans that are coming due usually find it very difficult to keep track of all the loan paperwork. Thus, as far as simplifying your finances is concerned, loan consolidation does appear an attractive option.
There are some other benefits of consolidation, too. These include:
After consolidation, you are left with a single loan with a fixed interest rate. There are no variable rate loans around your neck any longer which is very good news in a rising rate environment, because in such an environment, variable rate loans tend to go in only one direction up!
Depending upon the size of your debt, your repayment time-table will be extended by 10 years to 20 years. This will naturally shrink your monthly payments.
You will have to worry about writing just one student loan check each month instead of two or more.
Drawback.
Having talked of various benefits of student loan consolidation, let us look at its most serious drawback. Even a school student will tell you that anyone who stretches his/her loan term from 10 years to 20 years or maybe even longer, will end up paying a lot more money, thanks to the interest payment for a longer time period. Thus, just because you are finding it difficult to pay off two or more loans now, rolling them into one so as to lower your monthly payments but almost doubling your loan term and ending up paying the lender a lot more, thus this sound really attractive Does this whole thing make sound financial sense But the point is, if you are really finding it difficult to pay-off your various student loans right now, you may be left with no other option but to go for loan consolidation, even if it means paying a lot more in the longer run.
However, the good news is that there are no per-payment penalties. So if you have no major personal financial constraints, there is no reason why you couldnt make much larger payments so as to pay-off your principal as quickly as possible, and thus substantially save your interest expense. In any case, having a very long repayment period for a student loan is not the best way to go about it. Hardly anyone will relish a scenario where his/her children are ready to go to college and he/she is still repaying his/her student loan!!
In some other situations too, loan consolidation can turn out to be a pretty bad idea. Say, you have just a couple more years or a few thousand dollars more to go to payoff all your student loans. In this case, loan consolidation will hardly benefit you. In fact, it may turn out to be more trouble than its worth. If you switched to a new lender for consolidation, you will lose any benefits you may have earned from your present lender, such as a reduced interest rate as a reward for on-time payments over the years. Bottom-line. If you can pay off your present monthly installments without any great financial hardship, always be circumspect as far as loan consolidation is concerned, even if the terms of consolidation appear very attractive. If you have decided that loan consolidation will benefit you in a big way, then shop around. Knowing what different lenders are offering will help you in getting the most favorable loan terms.
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