Most students could not afford to pay for their college or university education, thus, a lot of them secure a student loan which usually comes from public or private financial institutions or the school itself where the student is attending.
Since every year, tuition and other school-related fees increase, students have no choice but to resort to student loans. Eventually, students find it harder to repay loans that have piled up over time. And so, in order to lessen their burdens, most of them would opt to consolidate their loans.
Student loan consolidation is merging different loans into one
Student loan consolidation is combining different student or parent loans into one from either the same or different lenders. The result is easier payment terms and bills only come ones a month. Best of all, the interest rates are consolidated and fixed for the rest of the loan’s tenure.
In the United States, student loan consolidation is available to all federal student loan programs, including Stafford loans, Perkins loans, and Parent loans.
Paying student loan consolidation
Payment for loan consolidation is usually extended and takes longer time to pay. Borrowers could opt to pay up for up to 30 years. Paying monthly installment might seem a money-saver but if payments are totaled, including the interests paid, student loan consolidation is comparably higher than the other kinds of student loan.
For computing the interest of consolidated loans, all the interests accrued are added and the weighted average is computed. It is then rounded up to the nearest 0.125% and capped at 8.25%
For consolidating loans with different interest rates, the average is usually computed as the sum of the interests divided by the number of interests. Even though the interest of a consolidated loan is cheaper than the highest interest rate of your previously unconsolidated loans, when computed, the fixed interest on the other hand is slightly higher than the lowest interest rate of the earlier unconsolidated loans.
Consider the factors first before you consolidate your loans
Loan consolidation is not at all advisable for all borrowers because some of the incentives offered in ordinary student loans are not available in consolidated loans. Among the excluded incentives include the special forgiveness circumstances in case the borrower has defaults in payment and the six-month grace period.
Consolidating loans do not require a fee, though consolidating the loans of two individuals is not allowed. Married students cannot also consolidate their student loans after the repeal of the provision of the Higher Education Reconciliation Act in 2005.
The repeal was, in part, enacted to avoid conflicts in the future. When loans are consolidated by married couples, each one is responsible for paying the entire loan. When marriage breaks or when the couple divorces, the loan cannot be separated, worsening the conflict between the two.
Students are not allowed to consolidate their loans while they are still in college. Consolidation of loans is allowed only when the borrower has already graduated. Usually, the arrangement may take place anytime within six months grace period. On the other hands, parents who arranged a series of loans could consolidate them anytime.
Consolidating a loan is not at all the solution to for easy debt management. It is just a tool to make payments easier and more comfortable for the borrower. Whether the loan is a burden or an ease, it all depends upon the borrower. Proper and reasonable spending and efficient allocation of funds are some of the advisable steps that will help you repay a loan while still having something to spend for yourself.