Consolidating Student Loans | Choose Carefully
The Only 4 Steps to Use in Consolidating Student Loans
Before consolidating your student loans, review your individual loans carefully. Simply having your monthly payment lower could cost you substantially more in the long run. One of the primary reasons for consolidating student loans is to save money by paying less interest and also to lower your monthly payment.
Students that have to rely on student loans to finance their college education can have as many as sixteen (16) individual student loans. And if that student has to borrow to finance graduate school as well, they will have a few more student loans to contend with.
Practically every semester or at least quarterly, a student will be confronted with different rates of interest as well as a monthly statement from the lender. Trying to keep a handle on this many loans and the amount due each month, will challenge anyone. Just by having all of these loans consolidated will make that job much easier.
[bctt tweet=”Consolidating student loans will result in combining several individual loans with varying rates of interest, and will make it easier to repay the loan.” username=”HBSMoneyTips”] Unfortunately, there is no “one size fits all” solution, so each student must carefully review their own situation. There are four (4) issues to consider in order that a student can make an intelligent decision.
- Besides the amount of the loan, the student needs to know the type of loan and the date that it was disbursed. It’s not uncommon for a student to have a mix of non-subsidized and subsidized Stafford loans.
The present loans will have different rates of interest so the student must contact the loan servicing agent to find out the interest rate on each loan and to find out if the rate is fixed or variable.
When consolidating student loans, the new rate is based as an average of all loans being consolidated. It’s possible that the new rate could be higher if several low rate loans are consolidated with other high rate loans.
In addition to the above, the student must know if their loans are through the government or a private lender.
Private loans can’t be consolidated with a Federal lender but many private lenders are willing to consolidate federal loans. This is almost never a good idea.
- The second area to review is possible benefits on the federal student loans. You’ll discover that there are different benefits even on government loans. If you have a Perkins loan, as an example, there are debt forgiveness options that you won’t find on Stafford loans. There are options to forgive the entire Perkins loan if the student enters law enforcement, serves in the Peace Corp, military service, and several other options. Consolidate a Perkins loan and the debt forgiveness options are gone.
There are also income based repayment options with a Perkins, Stafford, and Grad Plus loans. This is not available with a Parent Direct Plus loan. Consolidating student loans can make the above benefits disappear; however, other benefits come into play such as debt forgiveness with the Public Service Loan Program.
Another important one is the Pay as You Earn repayment plan. Confusing isn’t it? That’s why we strongly urge that you get all of the facts and carefully analyze your situation before you consolidate your student loans.
- As we said before, just simplifying a loan by consolidation is no guarantee of savings. That is a part of the reason for consolidating student loans, but just as important, is saving by paying less interest over the life of your loan. Improving your cash flow by having lower monthly payments is another reason.
- When analyzing your various loans, consider short term as well as long term. Don’t be pressured to do a consolidation based on your current financial situation. At this time most graduates are just starting out with a first job and finances should be improving over time.
If you happen to be in a profession where salaries are low to begin, but increase over time, then perhaps an income based repayment plan might be a better option. Just the opposite is true if the graduate is in social work where salaries don’t increase all that much. Consolidation in conjunction with an income based repayment program may work better.
Any borrower in default should seriously consider consolidating their student loans and setting up an income based repayment program. They won’t save any money by paying less interest, but at least the loans would not be in default.
You can see why consolidating student loans is not for everyone, and most certainly, will not benefit all borrowers in the same way.
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Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a multi-state law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.