It is no secret that student loans are one of the fastest growing consumer-based loans. In 2017, graduates owed an average of $39,400 due to a combination of private and federal loans.
And while collecting a loan is becoming an increasingly common occurrence, keeping track of all your loans, due dates, and minimum repayments can be very confusing and stressful.
If this applies to you, then consider consolidating your loans in order to manage your debt as efficiently as possible. However, while that sounds like a great option, it is important to know what you are getting into before you make any commitment.
What is Student Loan Consolidation?
If you find yourself burdened with the weight of all your loans and you wish to streamline repayments, a great way to do so is by consolidating your debt with a Direct Consolidation Loan. This simply means the government provides you with a new loan for the cumulative amount of all your old ones ensuring all subsequent repayments are grouped together.
Another plus is the fact that the interest offered on this sort of loan is fixed; meaning it is not going to change throughout the duration of your loan. Usually, this interest rate is calculated by taking the average of all your previous loans.
Taking out a Direct Consolidation loan allows you to reduce the stress caused by your debt and provides you with all the benefits of a federal loan. Furthermore, it’s also possible that Direct Consolidation loans allow you to qualify you for other federal government benefit programs.
When is it the Right Time to Consolidate My Loan?
While it’s not necessary to consolidate your loans, and you may not need to, doing so can be beneficial. Here are some situations that might make you want to consider consolidating your loan:
You Want a Lower Monthly Payment Rate
As a graduate, you automatically become enrolled in a 10-year standard repayment plan. If you cannot afford your repayments, you may want to consider consolidating your loans in order to get your repayment extended for about 30 years reducing your repayment amount.
While this means you pay more interest over the new duration of your loan, for some people the breathing room it provides their budget is worth it.
You Don’t Qualify for Loan Forgiveness or IDR Plans
If you have received loans in the past from the federal government through its Family Education Loan program or the Perkins loans, you do not qualify for the following:
- Income-driven Repayment Plans: With an IDR plan, the length of repayment is extended, and the monthly payment is fixed at a percentage of your discretionary income. Also, depending on income and family size, you could receive payment as low as $0. After 20 – 25 years of consecutive payments, what is left is forgiven, but you still have to pay taxes regardless.
- Public Service Loan Forgiveness: If you apply for a position at a nonprofit approved by the government or a government agency, you could be eligible for loan forgiveness through the PSLF. As soon as you have made 120 qualifying payments (payments under an IDR plan work as well), the rest of the loan is forgiven.
Should you consolidate your loans, they become part of the Direct Loan Program making you eligible for PSLF or IDR plans.
You Want a Set Interest Rate
If you have a mix of federal and private loans, chances are you are paying varying rates. This makes it hard to plan for the next month as the value could change depending on how the market behaves.
The stability afforded by a fixed-rate loan along with fixed payments is one of the reasons why consolidation is so popular. As soon as you consolidate, your new loan will have a set rate and a repayment plan that does not change.
Consolidating vs. Student Loan Restructuring
Although the terms ‘consolidation,’ ‘restructuring,’ and ‘refinancing’ are used interchangeably, the truth is they do not mean the same thing. While getting a Direct Consolidation Loan has its positives, it may not save you money. And you can only qualify if you have federal loans.
If you fit into this category, then what you need is refinancing. When a refinancing loan is taken out from a private lender, you can pay for some or all of your loans. You could also get access to new interest rates, new repayment period, and new minimum payments.
But refinancing is not without its cons. If you refinance a federal student loan, you become ineligible for benefits like IDR plans and PSLF.
When to Refinance Over Consolidating Your Loans
You Want to Save Money as You are Repaying Your Loans
After refinancing a loan, you could be eligible for a lower interest rate which could mean more money saved totaling thousands of dollars over your repayment period.
Consider this; you had $35,000 in student loans, a 10-year repayment plan, and a 7% interest rate; you would end up paying back a total of $48,766 over the length of your loan. Due to the interest, you would end up paying over $13,000 in addition to the amount borrowed.
But if you sought out refinancing and you were approved for the same repayment plan with a 4% rate, the total amount you would pay would be $42,523 meaning you would save about $6000.
You Don’t Want a Fluctuating Interest Rate
If you have private student loans or old federal loans, you could be subject to multiple interest rates, and as the market goes through cycles, the amount you are expected to repay could be different from month to month.
If you want to have a fixed amount you are expected to pay every month, you can opt for loan refinancing and request for a static interest rate. This means your loan amount does not change and neither does your repayment amount.
You Want a Lower Monthly Payment
If you cannot meet your monthly repayments, you can also consider refinancing your loans. You can be approved for a lower interest rate and a much longer repayment term reducing how much you are expected to pay every month.
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