If you have several student loans, you may already know that you can consolidate the loans into one loan. Here’s how student loan consolidation works. You approach a willing bank, and the bank gives you a loan to pay off your student loans. After paying off your student loans, you are responsible for servicing the new larger bank loan.
In most cases, it’s relatively easy to consolidate all of your federal student loans as well as most private student loans. However, there are a few facts you should be aware of before rushing to consolidate your student loans. These facts will open your eyes to the downside and upside of consolidating student loans.
Consolidating your student’s loan is pretty much like refinancing your home. You get money to pay off your mortgage in full, but you will have to pay off the new loan. There are several advantages and disadvantages or home refinancing as many people found out in the home market crash of 2007. If people knew enough about home refinancing, maybe there wouldn’t have been so many foreclosures and incidences of families being kicked to the street. Benefits of Consolidating Your Student Loans
If you are a struggling grad in the current economy, you know how hard it is to land a well-paying job. You need a job that pays well so that you can comfortably pay off your student loans and keep up with your utilities and other financial responsibilities.
Since finding such a job may take you a while, consolidating your student loans is a really nice way to take some weight off your shoulders. In fact, for most students getting out of debt, consolidating student loans is the best option. Here are a few reasons why debt consolidation may be the right option for you.
- Lower Interest Rates
An obvious advantage and one that seems to draw the crowd in to consolidate their student loans is the lower interest rates. With a lower interest rate, you get to keep more money in your pocket than you had when you had multiple loans to repay.
You get to keep a whole lot more if your credit score is sound, or the interest rates have dropped since you took the student loans. The lower interest rates may help you repay the loan faster also.
Also, while checking your options to consolidation your student’s loans, make sure you go for the fixed-rate interest plans. Most federal student loans are fixed-rate, but private lenders offer both variable and fixed-rate plans.
The variable rate plan may sound enticing since, on paper, you are paying anywhere between 2 to 3 percent interest, but they can go up in the blink of an eye. Signing up for a variable rate may set you up to rising rates for all the time you are paying for the student loan refinancing.
- Consolidation Lowers your Monthly Payments
A federal student loan repayment program takes anywhere between 5 to 20 years. Consolidating your student loans gives you a longer time period to repay the loan. With a longer repayment period, you end up paying less on your monthly repayments.
Extending the repayment period comes in handy when you are in a tough spot because it gives you a little breathing space to figure things out and securing a stable income.
The Downside Of Student Loan Consolidation
Like with everything else, consolidating student loans is not a one-size-fits-all option. There are a couple of things that go with it, and you should know the consequences of refinancing before you sign on the dotted line.
- Don’t Consolidate When You Are Almost Done
If you’re only a couple of thousand dollars short of clearing your student’s loan, or a couple of years from becoming debt free, refinancing your student loan may not do you any good. If you can make the payments without straining yourself, don’t consolidate your debts.
You don’t want to get stuck with another loan for another decade while you could have seen things through in the first place.
- Consolidating Your Student Loans May Cost You More
Taking another loan to pay off your student loans might be expensive in the long run. The interest charged on the consolidated loan may end up costing you more compared to paying off the loans on your own.
If you are capable of paying off your loans without overextending yourself, do it and don’t be tempted by easy methods of consolidation. Make sure you understand everything before signing on any documents that might tie you for the next two decades.
- You May Lose Standing With Your Lender
Some loans come with perks that allow you to save on the overall cost of paying back. Perks like principal rebates and interest rate discounts disappear when you consolidate your student loans. Be mindful of these perks when considering consolidating.
- You Forego Repayment Alternatives
Repayment options like grace periods and payment plans grounded on your income vanish when you consolidate. If you find yourself in a situation where you are not earning nearly as much as you would wish, but there is a chance of a raise, it’s worth checking these alternatives before consolidating.
Its true some consolidation options come with their alternative repayment plans, but not all of them offer lenient options. Make sure you go over these before signing on the dotted line. In fact, you can compare the alternatives to the federal repayment options to see if they are of value to you.
One final word about options to consolidation of your school debts
There are scams littered everywhere. Most of these scams are easy to single out because they offer too-good-to-be-true offers. It’s entirely okay to be attracted to these offers especially if you have financial difficulties. However, always walk away when a lender mentions things like processing fees or eliminating your debt entirely. If you are charged anything beforehand, you are likely being lured into a scam.