“I've got loans (I've got loans)...in different area codes - Student Loan Consolidation Basics
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"I've got loans (I've got loans)...in different area codes - Student Loan Consolidation Basics

July 17, 2016

So we've accepted the fact that we have to...well it would be in our best interest to, pay back the student loans taken out during college to make all of our future career dreams come true (or not).  We've figured out how many loan service providers we have, amounts owed, payment due dates, and have realized "I have 10 different loan providers I have to pay back at all different amounts and all different times of the month.  I give up on being an adult today." It can definitely be overwhelming managing so many loans and in the spirit of setting ourselves up for financial success, we should explore options available to get these student loans in check.  Consolidation anyone? Consolidation loans combine several student loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans.  There are programs to consolidate federal loans (check out studentloans.gov), as well as some lenders offering private loan consolidation (ex. Wells Fargo Private Consolidation Loan).

 

Consoli-Pros

 

One payment - Probably the biggest benefit of consolidating your student loans.  Dealing with one bill collector is a whole lot easier than 5...10..or 15.  That loan will be serviced by one lending institution and requires one monthly payment.

 

No min/max consolidation amount - Typically for federal loan consolidation programs, there is no minimum amount to qualify and no maximum amount that can be consolidated.  Private loan consolidation programs tend to have ranges of how much they will consolidate so review the program details.

 

Fixed interest rate - If you have a lot of loans, you probably have a lot of different interest rates. A consolidated loan has a fixed rate for the life of the loan. It's calculated based on the average of the interest rates on all the loans being consolidated, rounded up to the nearest one-eighth of one percent.

 

Deferment/forbearance - Since a federal consolidation loan is a new loan, it restarts the clock on deferments and forbearance for up to three years. Also, if you can’t repay a Federal Consolidation Loan because you are looking for a job, you can apply for unemployment or economic hardship deferment and delay paying for up to three years.

 

Multiple repayment plans - A federal consolidated loan is eligible for a number of repayment plans and borrowers are free to choose the plan that best suits their situation.  Borrowers also can switch repayment at any time. Repayment plans for Federal Consolidated Loans include: Standard (10 years), Extended (25 years), Graduated (start low, increase every two years for between 10 and 20 years), Income-based (10-15% of your discretionary income).

 

Lower payments - Consolidation offers a variety of repayment plans, most of which extend the terms of the loan from 10 years to 15, 20 or even 30 years. It’s also possible to get reduced interest rates and that too will reduce monthly payments.

 

Consoli-Cons

 

Single loan benefits gone - Some federal loans, such as Perkins Loans, have cancellation benefits if you meet certain requirements. Those benefits could go away if you consolidate the loan. For example, police, firefighters and teachers can have 100 percent of a Perkins loan canceled, if they meet certain conditions. That opportunity could go away if the Perkins loan becomes part of a Federal Consolidation Loan.

 

Lender benefits gone - Some lenders give reduced interest rates or principal reductions if borrowers meet certain conditions. Those benefits are lost when the your student loans are consolidated.

 

Lost “grace” period - Borrowers typically get a six-month window before having to start repaying student loans. That goes out the door when you consolidate your loans. You typically start paying two months after your loan consolidation is approved.  Consolidate wisely.

 

No mulligans (no do overs) - You can only consolidate student loans one time. If interest rates fall after you consolidate, you’re stuck with the interest rates you agreed to during consolidation.

 

So is consolidation for you?  It depends.  My recommendation is to look at all options and align your decision to your what your goals are.  If you want the ease of making one payment, potential lowered payments, one interest rate, maybe it's for you.  I consolidated my federal loans after graduating and also was placed on a graduated repayment plan, which helped as the payment matched my "right out of college salary."  I look every so often into consolidating my private loans, but my interest rates on those are so low, it'd be silly to consolidate at a higher interest rate/payment just to save a little time making one payment.  Whatever you do, make sure it makes sense for your cents!

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