The American dream of finishing college and gaining a foothold to a bright and promising future need not go bust just because you still haven’t landed that dream job and already the payments on your student loan are falling due.
It’s true that being in debt is not the most ideal way to prepare for or start a career. It’s surely not what anyone has in mind when he or she plans for college, but sadly, it’s the reality for a majority of students who pursued post-secondary studies. Based on a 2008 study conducted by the College Board, two of every three college students in America is in debt by graduation day, at an average of around $23,000 per graduate.
Productive employment immediately after graduation is a way out of the debt, but the economic crunch gripping the country has taken a tough toll as well on the labor sector. A survey which was conducted by the National Association of Colleges and Employers revealed that among college graduates of 2009, only 19.7 percent had found employment at the time of graduation.
This reality has put a heavy burden on the graduates, who have gone into debt to pay for their college education, only to find that the employment they hoped to get, does not provide them enough to meet their needs and settle the loans they had racked up while in school.
However, if it’s any consolation or source of hope – on more than average, they do manage to pay off their loans and move ahead with the better opportunities provided by a college education.
How most graduates are able to settle their debt is by proper management of their payments. And one way to do this is by consolidating their student loans. This means combining all the different and varied student loans they had incurred in connection with their college pursuit into just one loan. This requires finding a lender who will pay off all these existing individual loans so that you will be dealing with only one entity instead of several lenders, and you will be making only one payment monthly instead of having to deal with many payments to various lenders, falling due at various days of the month. You will also have to deal with only one interest rate.
Student loan consolidation is not always the answer, though, and is not recommended for everyone. It does have its advantages and disadvantages as well.
Advantages and Disadvantages of Student Loan Consolidation
Student loan consolidation may not be the solution for all. The general rules, however, are that it could be the answer to your debt problems if you:
- Have several student loans that need to be settled simultaneously
- Have student loans with different interest rates
- Need to have a lower monthly payment on the total or combined payments of all these loans
- Need to find savings on the total interest of all these combined student loans.
If you said, “yes” to all these – meaning you fit the criteria – you still have to consider the advantages and disadvantages of consolidation.
The Advantages:
- It’s far easier to keep track of one lone payment to a single lender every month rather than several payments, at possibly different days of the month, to different lenders.
- Since the repayment period for a consolidated loan is normally spread out over a longer period, the monthly payment is likely to be less than the total of all your separate loan payments. For some borrowers, this could translate into savings of up to 60 per cent each month.
- Generally, a consolidated student loan comes with a repayment period from 10 to 30 years. This eases the pressure on the graduate and translates to a lower amount that he or she has to deal with each month.
- Interest rate is fixed and normally only to a maximum of 8.25 percent.
- Generally, too, no credit check is required by the student loan consolidating company, except for Direct Loan consolidation PLUS borrowers.
And the Disadvantages:
- An extended loan term may seem enticing, but what it really means is that you will be making more payments. This means that overall, you will have paid a much higher total amount compared to the sum of the particular loans.
- Consolidated loans may not give you access to a number of loan benefits such as discounts on interest rates, deferment of repayment, and rebates.
It’s good to keep in mind that while it may seem beneficial to you to have a lower monthly payment, you will definitely be paying more in the long run because of the extended repayment period. In very real terms, this could mean adding on several thousand dollars amassed by the interest alone. To illustrate this, if you extend your repayment period from 10 years to 20 years, it’s true you could shave off about 34% of the cost per month. But, you could be paying more than double on interest costs alone over that extended period.
Check out your possible savings using the private student loan consolidation:
|
Loan Amount |
Assumed Current Payment* | Initial Monthly Payment** | Monthly Savings | Annual Savings |
|---|---|---|---|---|
| $10,000.00 | $88.77 | $69.41 | $19.36 | $232.32 |
| $30,000.00 | $269.00 | $208.22 | $60.78 | $729.36 |
| $50,000.00 | $448.33 | $347.20 | $101.13 |
$1,213.51 |
| $75,000.00 | $672.49 | $520.55 | $151.94 | $1,823.28 |
| $100,000.00 | $896.65 | $694.07 | $202.58 | $2,430.96 |
*Assuming a 15 year loan term, with an original rate of 6.8%
**Assuming extended term of 25 years at same rate of 6.8%
***Interest rate and the resulting monthly payment(s) contingent upon borrower and/or co-signer credit
When to Consolidate
As with every financial move or decision, student loan consolidation should be thoroughly studied, and all aspects fully considered before making the final option. Remember that a consolidation loan is still a loan – you may be dealing with only one lender, but you will still be dealing with this lender, and on the terms you have both decided, and over a very lengthy period of time. Once a loan of this type has been made, you cannot reverse it – and so must abide by the terms until the loan has been fully repaid.
Here’s the advice in brief given by a loan guru: Consider loan consolidation only if and when you need a long-term solution, to ease or relieve high payment demands, and if there is a possibility of converting a variable interest rate to a fixed interest rate.
The first step is to take stock of all your existing student loans. This is easily accomplished by taking the time to list them all down to the very last detail, preferably in columns that are easy to study and compare. These include the following:
- Source of the loan funds: federal or private
- Amount of loan principal
- Interest rate
- Repayment period
- Monthly payment and due date
- Discounts, rebates, rewards, if any.
Treat federal student loans and private student loans separately as they cannot be lumped together in one consolidated loan. You are not advised to either, because federal student loans, for the most part, offer some form of short-term relief measures, such as deferment and forbearance, not offered by private loans. They likewise, offer quite a number of benefits and protections for the borrower, which private loans do not offer. Also, the interest rate applied on a federal consolidation loan is fixed – which should always be preferred to variable interest rate – and is computed as the average of the student’s various loan debts.
All federal education loans, including FFEL (Federal Family Education Loans) and Direct Stafford Loans, are eligible for consolidation on two conditions: the borrower is no longer in school, and the loan is in good standing. But even delinquent borrowers are still given a chance to consolidate the loans and get back on track if they get the accounts in order before applying for consolidation.
All federal loans, even if you had received them through a private lender, can be consolidated through the Federal Direct Consolidation Loan program. This program offers several types of repayment schemes that you could avail of.
Over the past few years, due to the present financial crisis, many private companies have withdrawn from the student loans market, including servicing loan consolidation. For this reason, a private student consolidation loan is more difficult to apply for and obtain. Interest rates are generally higher, and terms are based on the borrower’s credit score, which may be rather low to begin with. Private companies, unlike the government, may also charge some fees for application and processing pre-payment penalties.
Financial advisors point to only four main lenders who still offer student loan consolidation: Student Loan Network, NextStudent, Chase and Wells Fargo. It would do you well to check out their websites and find out what they have to offer, and how they compare with each other.
Whichever one you decide to deal with, make sure you get all your questions asked and answered, such as: cost of application and origination fees; prepayment penalties, if any; interest rate, and if the variable, the maximum rate; and the life term of the loan or repayment period.
A good rule of thumb to remember is that a loan consolidation company is also a profit company and just as it officials make sure that the loan comes out positive for them, even more so should the student loan consolidation program be beneficial to you. And you have to watch out for yourself – because your college course depended on it, and now your future does too.
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