What does Student Debt Consolidation Mean?
Consolidating student loans is when you combine several loans into one loan from one lender. When combined, you only have one payment versus several payments. You’re still paying back all of the loans before consolidation. Debt consolidation can lower your interest rate and make monthly payments more manageable.
Benefits of Consolidation
A Lower Interest Rate
Obviously, having a lower interest rate means you'll spend less on your student loans over the course of the loan. In fact, you may save a great deal of money if the rates have dropped on the loan. If your credit score or financial situation improved, then you may find yourself saving a large sum of money that can go toward paying off your loan quicker.
Convert Your Variable Interest Rate Loan into a Fixed Rate Loan
Federal student loans come with fixed rates that don't change over time while private loans can either be variable or fixed. A variable loan interest rate may look low since it may start out at only two or three percent, especially when compared to a fixed rate at six or seven percent, but variable rates will increase and continue to do so the entire duration of the loan. And you never know just how high they might go over time.
Decrease Your Monthly Payment
On average, you'll repay for student loans anywhere from five to 20 years, as denoted by statistics provided by the U.S. Student Loan Center. You can increase the amount of time you have to pay, but it will decrease the amount of money you have to put out monthly. For people living paycheck to paycheck, this decreased rate can help you to save money.
An Expected Increase in Earnings
In some cases, you may be able to get on a plan that works with how much money you earn or one that increases gradually over time. Grads who foresee themselves earning more in time may benefit from this option.
Consolidation of Multiple Loans
Shockingly, the average graduate has seven different loans through two or three loan services. Trying to manage these different accounts can be difficult and a pain. When you consolidate, you'll only have one payment to remember, which makes meeting deadlines and tracking your balance easier.
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Other Things You Should Know
Weigh the pros and cons
It seems like it wasn't long ago that you were applying for college. Now, you're at the point where you've graduated and have a shiny, new degree. However, in addition to leaving college with a degree, you probably also have a great deal of student loan debt to start paying off. When you opt to consolidate as a grad, you can get all your loans combined into one loan. While this sounds tempting, it might be best to think about both the pros and cons.
Loan consolidation in a nutshell
Loan consolidation is when you take out another loan that combines all your smaller loans together. You won't have to make more than one payment to more than one lender. You'll only have to pay one payment on the new loan you got. The new loan comes with a new interest rate. The loan repayment terms more than likely will be different than your other loans. It's appealing because consolidation equals lower monthly payments.
Consolidating Federal Student Loans
The types of loans you have matter when you decide to consolidate. A majority of your federal loans such as your Direct Plus, Stafford and supplemental loans may be consolidated together. When you have only federal loans, the interest rate of all the loans are added together and then the average interest rate is determined in order to find your new interest rate for your consolidated loan. There is a cap on interest rates that won't let them go above 8.25 percent. One of the most important benefits of federal consolidation loans is that you need to have a super high credit score to do so. You can apply whenever to consolidate, even if your loan is already in default. You'll get a fixed interest rate no matter what. It doesn't matter how much the market changes, you'll never have to pay more than 8.25 percent on consolidated loans.
Generally, you can only consolidate a private loan with other private loans. These loans usually have variable interest rates when they're consolidated. When you opt to consolidate when the interest rates are low, you could save thousands over the course of the loan. However, a variable interest rate means that the interest rate might heighten greatly as the years go by.
While it's easy to consolidate federal loans, you might have some difficulty consolidating private ones. Private lenders will make you pass a credit check in order for you to get the best rates.
Those who don't have an excellent credit score may end up paying more when they consolidate. New grads who don't have much credit history may find themselves needing a co-signer. With some loans, you can release the cosigner after so long.