Just as the national student loan debt has risen, so has the popularity of student loan consolidation. The concept has several advantages and disadvantages.
Possible benefits would be eliminating the need to juggle several different private student loans by reducing it to just one with a single lender. This benefit would apply only if you either don’t have federal student loans in addition to private ones, or you’ve been able to locate a consolidating lender who offers the consolidation of private and federal student loans together, a practice which is becoming ever more uncommon. In addition, you may be able to negotiate a lower monthly payment; you’ll only have to deal with the rules and regulations of one lender, versus having the rules and regulations of many lenders; and you might be able to lock in a lower fixed interest rate than you have on your existing loans. Also, if you should find yourself unemployed or sick, it’s easier to get leniency from a single lender than trying to work it out with multiple ones.
Still, there are a few negatives to consider. First, while you might be able to get a lower monthly payment than you would have with all the individual student loans, the life of your newly combined loan will likely be greatly extended, as will the amount of interest you’ll end up paying. Also, you should check the fine-print carefully as some of your existing loans may have pre-payment penalties, which could kick in when your consolidating lender pays them off to create your new single all-encompassing loan. Putting an eye towards the future, if you were able to keep your individual student loans separate and all payments current, your credit score would benefit greatly by showing that you are capable of handling and paying off your many debts successfully.
Here are some tips should you choose to undergo student loan debt consolidation:
Timing is everything.
Applying for loan consolidation during the typical 6 months post-graduation grace period before your first student loan payments become due can allow you to ease into it, giving you a chance to find good employment and not become overwhelmed right away. However, there’s something to be said for patience. If you are able to handle your individual student loan payments on time for 3 years or more, your credit score will be drastically improved and you could score a much lower interest rate if you eventually do decide to consolidate. The higher credit rating would of course be a benefit when it comes to more than just student loan debt!
Don’t go it alone
If you can convince a family member with very good credit to cosign for you, you will enjoy a lower interest rate than you might be able to otherwise. Understand that cosigners take on a great deal of responsibility by doing so, since if you default on your loans they become responsible for them. Make sure to read the fine print and choose a lender who allows cosigner release, which allows a cosigner to be dropped from the contract after a pre-determined amount of payments, usually ranging from 24 to 48. This option will usually make someone more likely to be willing to cosign for you than if they had to remain on the contract throughout the life of your loan.
Polish your credentials
Making sure you know what’s on your credit report before you go shopping for student loan consolidations can give you better leverage when you begin to negotiate lower interest rates. Consumers are allowed one free copy of their credit report from each of the 3 main credit report agencies, TransUnion, Experian and Equifax, per year through the Annual Credit Report clearing house at www.annualcreditreport.com. Reviewing it well in advance will give you time to take care of any issues or errors, understanding that it may take several months for changes to register.
All interest rates are not created equal
Putting your credit report to work for you, shop around and get several interest rate options for your student loan consolidation. It’s important to keep the duration of the loan repayment period in mind, as a higher interest rate might not be as bad with a 5 year consolidation loan as a lower interest rate on a 15 year one could be. Also, it is a common practice for financial institutions to give a potential borrower a range of possible interest rates before they actually process their application and grant a final decision, however, avoid signing anything before you are given an exact rate. Even then, hold off accepting until you get a few different offers and do some side-by-side contract comparisons.
The future is indefinite, so get it in writing
With the United States struggling under an all-time high rate of student loan debt, many banks and lenders are closing down their student loan consolidation or refinancing programs due to there being little to no profit left in it for them. Therefore, you should inquire what would happen should something happen to your lender’s business which would alter your contract in some way. Although in most cases your debt would continue to be due as stated, many contracts are now putting clauses in to cover their assets. Still, you might not know or notice if you don’t ask about it directly.
Do it right the first time
Generally, you can only consolidate your student loans once, since what used to be several different financial entities have been combined into one. The only time you’ll usually have the option to reconsolidate is if you take on a new loan. Therefore, you really want to make sure you’ve made the best choice when it comes to interest rate, repayment terms, and length of the repayment term. Sometimes, but not always, you might be able to negotiate a lower interest rate after you’ve paid on your consolidation loan for quite a while, especially if your credit has improved greatly, but don’t allow your decision to hinge on that possibility. Really take the time to make sure that what you are signing up for is something you can work with in the long run, and read all the figures and fine print several times. It’s always helpful to have someone else read it over, too, as they might see something which could use clarifying or have questions worth asking.
Keep it in the family
Do not refinance or consolidate your student loan debts into a non-student loan because right away you’ll lose any protections and benefits you might enjoy otherwise. In most cases, except for situations like combining it with a mortgage, you’ll lose the ability to deduct the interest on your taxes, which can be significant over the life of your repayment term. Benefits such as flexibility of repayment and the possible option of forbearance or forgiveness for such things as public service may be lost. Also, student loan debt is considered more positive than many other kinds of debt, such as credit cards, by creditors. In most cases, it’s just best to keep private student loan consolidations as simple as possible.
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