There is always the difficult choice for an undergraduate or graduate as to whether he should take out a federal loan or a private loan. Each has its own benefits and drawbacks, depending on which lending company he is going with. For example, federal loans can be tax deductible, while private loans are not. Another is that federal loans can be forgiven in all or in part if the student is performing certain kinds of service, such as military service or practicing medicine in certain kinds of communities.
Consolidation on federal and private loans is also different, as very few companies are willing to consolidate these two kinds of loans together. There are also several benefits for each kind of consolidation that is absent from the other.
Here are a few difference between federal and private loan consolidation.
Federal student loan consolidation has fixed interest rates, while private student loan consolidation does not. Fixed interest rates make it easier on the student to determine his spending each month so that his budget can be balanced accordingly and not run the risk of going into default. Variable interests can be beneficial, if the student knows how to play the market and consolidate at a time when interests rates are at their lowest. However, this can be a gamble and make it much more expensive in the long run for students who have not yet found employment.
Federal consolidation rates are also dictated by the government, not the lenders themselves, so the interest rates are not arbitrary and are not able to rise above a certain amount.
BENEFITS AND INCENTIVES
Private loan consolidation provides incentives for consolidation, such as cosigner release. By making a certain number of automated payments, a cosigner of the original loan can be released from responsibility on the loan if the student ever goes into default. This makes the student alone accountable for the loan, and the cosigner, usually parents or grandparents, are not sought after by lenders. In the long run, this gives the student greater responsibility for keeping a budget, as he will be the only party responsible for the loan.
Private loan consolidations also have longer repayment plans, meaning that monthly payments are much lower than federal consolidations. This can especially help a student, if he is having problems finding employment, or if he is suffering from other financial problems.
There is also the added incentive that an improved credit score can help to reduce interest rates for private loan consolidation, especially if it has been improved since the loans were taken out.
Federal loans consolidations, however, have the benefits of deferment and forbearance. Deferment is where the payments on the loan amount an interest rates are temporarily delayed, on the basis of being unemployed, enrolled part-time, or during a period of economic hardship.
Forbearance is where payments can be stopped temporarily or reduced, on the basis of illness, financial difficulty, or the student qualifies for a partial repayment of loans under the U.S. Department of Defense Student Loan Repayment Program. However, interest will still accrue during this time period.
Deciding on whether to consolidate private loans or federal loans is entirely dependent on which loans are taken out in the first place. It is never recommended for federal loans to be consolidated with private loans, as essential benefits and rights are forfeited and the student will end up paying higher interest rates on these federal loans.
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