Should Student Loans Be Consolidated?
As a student, you might have heard about consolidation of the loans you have taken out over the course of your studies
. Loan consolidation lets you combine all those different debts into a single loan. There are a few points to consider before you decide to consolidate your student loans though.
Loan consolidation is a way for you to combine existing loans, extending the time of repayment, normally to between 10 and 30 years. Even if a consolidated loan earns from a fixed interest rate for the duration of the loan, you will actually be paying more in the long run because of the longer repayment period.
There are two types of student loan consolidation available ? Federal and Private. Stafford, PLUS, HEAL, Perkins and Direct Loans, are the ones that students can combine under Federal loan consolidation. There are no credit checks and no application charges or fees are required under the Federal student loan consolidation. This loan needs no co-signer and the borrower does not need to be employed.
Prepayment with a Federal student loan consolidation incur no penalties. The borrower can specify, if they pay more than the required monthly amount as prepayment which then accrues directly to the principal loan. This reduces the amount of interest paid and reduces the term of the loan as well.
The borrower can postpone payments if they opt to go back to school, using a Federal student loan consolidation. Working in federal volunteer programs or teaching in economic development zones, military service and others, can be a basis of application for forgiveness under certain circumstances. Federal consolidated loans are forgiven if the borrower should pass away. They qualify for a 0.6% reduction on the interest rate, if a borrower consolidates their loans during the grace period. Repayment, begins immediately however, and the rest of the grace period falls away.
Private student loan consolidation is offered by several financial institutions. Similar benefits to a federal loan consolidation are being offered like reduced monthly repayments with a fixed interest rate for the term of the loan. Private loan consolidation also offers a 48 month postponement for medical or dental residents, and a 36 month postponement for all military personnel who are still in active-duty.
However, the borrower will lose many of the benefits of the original loans if they opt for a private student loan consolidation. A co-signer is required and generally, forbearance and forgiveness becomes void. They can only qualify for a private consolidated loan if a borrower consolidates Federal and Private student loans. Twenty five years repayment for undergraduate loans are offered by private consolidated loans and up to 30 years for postgraduate loans.
It should be weighed against the loss of benefits and discounts offered on the original loans even if the immediate repayment relief may seem attractive. The extended repayment terms result in a much higher amount being repaid; for example, on a consolidated loan of $50,000 over 25 years, the repayments total over $100,000. In comparison, a monthly savings of $101 seem irrelevant. If the borrower has no option but to reduce monthly expenses in order to make ends meet, only then shall student loan consolidation be considered. If the borrower's original loans are federal loans then they can apply for a Federal student loan consolidation which appears to offer more benefits.
by: Kathryn Mcpherson
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