Student Loan Consolidation:
Getting Out of Debt
Getting Out of Debt
Introduction
When we talk about college graduation,
several promising life changes occur in our minds – potential careers,
independence as well as new beginnings.
However, although it means beginning of something, it still signifies
something less enjoyable too – the repayment of student loans.
As you all know, the repayment of ample
student loans can be off-putting for both students and their parents. It was found out by the Public Interest
Research Group in the US
that the average debt among student borrowers is currently in excess of
$16,500. That large! The Associated Press also noted that
graduates of public colleges and universities usually emerge owing more than
$10,000 for their undergraduate years alone.
Those who are in private institutions typically owe $14,000, while the
graduate-level students often owe more than $24,000. What’s more for those studying medicine or
law? For sure, they accumulate even more
debt. And, the bad thing is, repaying these debts
are even becoming more difficult for graduates in the midst of uncertain jobs
and the recession.
With the interest rates in all student
loan programs are now at record lows, there is no reason for the graduates not
to consider student loan consolidation.
It is often said that with student loan consolidation, students and
graduates can save thousands of bucks in interest charges.
Now let us look at the things involved in
student loan consolidation.
Student
Loan Consolidation: A Definition
Student loan consolidation is typically
defined as the process or the act of combining multiple loans into a single
loan in order to decrease the monthly payment amount or elevate the repayment
period. There are a lot of reasons
behind it, and among those is money saving payment incentives, decreased
monthly payments, fixed interest rates, and new or renewed deferments.
The
Plus Factors of Consolidation
Student loan consolidation has a lot to
offer. That is what many experts often say.
To find out what consolidation has to offer, let’s read on.
Overall Interest Savings
Over time, the student loans you have
borrowed have been assigned with different variable interest rates. Note that the key word here is variable. While the loan you received may have
offered, say, 3.5 percent at first, the rate will actually go up as the
interest rates go up. So, if you have
two or more of these loans, there is a great possibility that you may have owed
amounts at different rates, and these rates can rise and fall yearly. Considering that the interest rates have
nowhere else to go but up, it is no doubt a safe bet that the debt you have
accumulated will mount faster than it would if you consider a student loan
consolidation.
By considering consolidation and
remaining on your 10 years payment plan, it is possible that you can lock your
interest at today’s current loan rates and save some bucks over the long
haul. Aside from that, all of those
loans that may have come from different lending companies or banks can be a
burden to deal with. So, if you
consolidate, it means that you only deal with one single company and one
payment rather than several. Other than
that, you have the great chance to receive added bonuses like payment and
interest rate reductions in case you pay your debts on time over a period of
months. These benefits are also possible
to come if you have automatically withdrawn your monthly payment from a
checking or savings account.
Improved Credit Score
By considering a loan consolidation,
borrowers not only save or reduce their long term debt but can also help change
their credit score for the better over time.
It is worth noting that an improved credit score is a very important
factor when a person enters the “real” world and wants a new car, apartment or
charge card.
Here are some tips for you that can help
you as you enter the job market.
- More Open Accounts, The Lower the Score: Over the student borrower’s life, he or she may have borrowed up to eight separate loans to pay for school. Each of these loans has a different payback amount, payment terms and interest rate. The more accounts the student has opened, the lower the over credit score. Thereby, lowering the amount of open credit lines on a credit report is needed, but this can only be made possible through a student loan consolidation in which the older accounts will be combined into a single account.
- The Lower the Payments, the Higher the Score: When the credit report evaluation comes, it is usual in the process that the amount of the borrower’s monthly minimum payments is taken into account. So, when you hold a number of loans, every payment is considered part of the borrower’s monthly payment obligation. Those who have considered consolidation have only one payment to make, which is typically lower than the minimum amount of the separate, multiple loans.
- The Debt to Credit Ratio Matters: As you may know, the credit bureaus typically find out if you are in debt. They do this by way of evaluating the amount of your available credit you actually use. So, in case you have a total of $10,000 available on three credit lines and you owe $2,000, your score will then be considered higher than especially if you have maxed out your on credit line with a $2,000 limit. It is worthy to note that if a person has several loans with a maximum used, it will reflect negatively on his or her credit score. Given this fact, consolidating the accounts is very important in order to lessen the number of open accounts being used.
Returning to School is a Possibility
Many students and graduates left school
for family, career or financial reasons.
The odds here are they will want to return to college down the
line. However, if they fail to pay on
their student loans while they are out of school, there is a great possibility
that they can be kept from receiving any financial aid when they return. So, if financial reasons were part of the
primary reason they left school, it therefore implies that digging a much
deeper hole will only make it harder for them to come back.
By consolidating, the loans will also
become easier to manage and pay off.
And, once the loans are consolidated, you can retain your right for
forbearance as well as for deferment.
You can even take advantage of income sensitive and graduate repayment
options which you may not have encountered before while you’re on your multiple
loans.
Hiding from Loans is Impossible
There is one particular truth when it
comes to student loans – you can’t hide from them. It may sound extreme though, but school loans
are completely immune to bankruptcy and those students or graduates that failed
to pay their bills face stiff punishments.
The usual consequences are poor credit ratings, garnishment of wages, and
IRS penalties.
Besides, attaining licenses in certain
fields is impossible when you failed to pay off your student loan debts. There is even a chance that you may be
excluded from some government contracts if you own a small business. With all these consequences, it is then
clear that avoiding a student loan is no way to start a life after
college. If you do come back and take
out more and more student loans, you will be able to consolidate again after
graduation.
In the end, about half of the students
coming out of college have actually gained their degrees. Of course, it can be tough to remain and stay
in school with financial burdens, and it is harder to come back. But, thanks to student loan consolidation
that creating one less barrier to coming back to school and keeping your credit
rating clean is now possible.
The
Right Period to Consolidate
In the government consolidation loan
program, it is interesting to know that there are actually no deadlines
connected to it. It is supported by the
fact that you can apply for the student loan anytime during the grace period or
even on the repayment period. But to
consolidate student loans, some considerations must be paid attention. To consolidate student loans, you should know
that it usually take place during your grace period. At this moment, the lower in-school interest
rate will then be applied to estimate the weighted average fixed rate to
consolidate student loans. And once the
grace period has ended on your government student loans, the higher in-repayment
interest rate will be applied to estimate the weighted average fixed rate. Given such process, it is then understandable
that your fixed interest rate for government student loan consolidation will be
higher if you consolidate student loans after your grace period.
And when you are interested to
consolidate student loans, you should know that even of your student loans are
already in repayment, to consolidate student loans is still allowed and
beneficial. It is for the reason that
when you consolidate student loans at this time, you already fix the interest
rate on your government student loans while the rates are still originally
low.
Conclusion
As presented, student loan consolidation
can help most borrowers in many ways.
But, it is still necessary to note that rates won’t actually stay low
without end. In fact, they are so low
now and the only place for rates to go is up.
So, if you are on your way out of college, saving every cent you can in
today’s tough job market is worth considering.
And, regardless of the situation you are in to right now, consolidating
your college loans is a practical decision.
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