Whether you’re seeking a post-college gig or are well into a career, your student loan debt hangs overhead like an impenetrable dark cloud. You’ve been working diligently to pay your loans down but can’t seem to make a dent. You’re interested in loan consolidation but aren’t sure how that works. Here’s some information about how to consolidate the student loans to help you decide whether the approach is right for you.
About Student Loan Consolidation
The ins and outs of student loan consolidation depend upon whether you have a federal, private, or a mix of loans and whether the consolidation loan is federal or private.
Basically, debt consolidation allows you to combine multiple loans into a single new loan that you’ll use to satisfy your current debts. And instead of making multiple payments each month of varying amounts, you make one payment monthly of the same amount. Your debts are more manageable that way.
Rather than go for consolidation, you could try modifying repayment plans to extend loan terms and get lower monthly payments. But that won’t lower your cost of borrowing.
Federal And Private Student Loan Consolidation
If you have multiple federal student loans, you may want to consider a Direct Consolidation Loan, which allows you to roll them together. The interest rate for the new loan issued by the U.S. Department of Education is a weighted average of your previous rates.
You can also choose to extend repayment terms to up to 30 years, which would lower your monthly outlays. However, you should note that if you repay your new loan over a relatively long period of time, you’ll wind up shelling out more in interest. If you have outstanding interest in your current loans, that interest will be capitalized, meaning it will be added to the principal. Also, you may have to forego existing loan benefits like the progress made toward student loan forgiveness.
On the other hand, a private consolidation loan, also called a refinance loan, comes from a bank or credit union. Such a loan usually permits you to fold federal and private loans into one. It differs from the Direct Consolidation Loan in that you may be able to snag a better interest rate than what you’re paying now, which would result in a lower monthly payment. That depends largely on your creditworthiness, but terms also consider your income, debt level, and employment history.
How To Consolidate
It’ll take about a half-hour to apply online for a Direct Consolidation Loan. You’ll need your federal student aid (FSA) identification and some personal and financial info.
If you’re applying for a private consolidation or refinancing loan, choose a lender, then follow that entity’s directives. When selecting a lender, read student loan reviews and research each company in which you’re interested. It’s common for applications to be able to be completed over the phone or online.
You will also need to decide whether you want a variable or fixed interest rate. With fixed-rate financing, your loan’s interest rate stays the same over the life of your loan. With a variable-rate loan, the interest rate changes as the interest rate changes, meaning it could increase or decrease. The longer the loan term, the riskier a variable rate loan can be since there’s more time for rates to go up.
Now that you have a consolidation loan, you have just one payment due monthly of the same amount every time. To stay atop your financial situation, draw up a budget that includes your new monthly payment, and when you have extra cash, try to pay more than the minimum due monthly.
In sum, too much student debt can affect your ability to tuck cash away for retirement, increase disposable income, or qualify for other loans, such as a mortgage. Now that you know how to consolidate your student loans see if the strategy suits your circumstances. If so, you could soon be on the road to better financial health.