By Vanessa McHooley
Student Loan Consolidation – How does it Work? Student loans area great source of financial aid for students who need helppaying for their education. Unfortunately, students often leavecollege with burdensome debt. In addition, they often havemultiple loans from different lenders, meaning they are writingmore than one loan repayment check each month. The solution tothis problem is loan consolidation.
What is loan consolidation? Loan consolidation means bundlingall your student loans into a single loan with one lender andone repayment plan. You can think of loan consolidation as akinto refinancing a home mortgage. When you consolidate yourstudent loans, the balances of your existing student loans arepaid off, with the total balance rolling over into oneconsolidated loan. The end result is that you have only onestudent loan to pay on.
Both students and their parents can consolidate loans.
Should I consolidate my loans? Loan consolidation offers manybenefits:
-Locks in a fixed, usually lower, interest rate for the term ofyour loan, potentially saving you thousands of dollars(depending on the interest rates of your original loans) -Lowersyour monthly payment -Combines your student loan payments intoone monthly bill
In addition, consolidated loans have flexible repayment optionsand no fees, charges, or prepayment penalties. There are also nocredit checks or co-signers required.
You should consider consolidating your loans if theconsolidation loan would have a lower interest rate than yourcurrent loans, particularly if you are having trouble making youmonthly payments. However, if you are close to paying off yourexisting loans, consolidation may not be worth it.
How will the interest rate for the consolidated loan be? Theinterest rate for your consolidated loan is calculated byaveraging the interest rate of all the loans being consolidatedand then rounding up to the next one-eighth of one percent. Themaximum interest rate is 8.25 percent.
To figure your interest rate, visit loanconsolidation.ed.gov foran online calculator that will do the math for you.
How much can I save? How much you save by consolidating loansdepends on what interest rate you get and whether you choose toextend your repayment plan. According to Sallie Mae, the leadingprovider of student loans in the United States, consolidatingstudent loans can reduce monthly payments by up to 54 percent.However, the only way to reduce your payment this much is toextend your repayment plan. You typically have 10 years to repaystudent loans, but, depending on the amount you'reconsolidating, you can extend your repayment plan all the way upto 30 years. Remember that if you choose to extend yourrepayment term, it will take longer to pay off your overall debtand you'll pay more in interest. There are no preypaymentpenalties, so you can always choose to pay off the loan early.
Am I eligible to consolidate my loans? In order to consolidateyour loans, you must meet the following criteria:
- You are in your six-month grace period following graduation oryou have started repaying your loans -You have eligible loanstotaling over $7,500 -You have more than one lender -You havenot already consolidated your student loans, or sinceconsolidation you have gone back to school and acquired newstudent loans
The following types of loans can be consolidated:
-Direct Subsidized and Unsubsidized Loans -Federal Subsidizedand Unsubsidized Federal Stafford Loans -Direct PLUS Loans andFederal PLUS Loans -Direct Consolidation Loans and FederalConsolidation Loans -Guaranteed Student Loans -Federal InsuredStudent Loans -Federal Supplemental Loans for Students-Auxiliary Loans to Assist Students -Federal Perkins Loans-National Direct Student Loans -National Defense Student Loans-Health Education Assistance Loans -Health Professions StudentLoans -Loans for Disadvantaged Students -Nursing Student Loans
Where can I get a consolidation loan? You can consolidate yourloans through any bank or credit union that participates in theFederal Family Education Loan Program, or directly from the U.S.Department of Education. The loan terms and conditions aregenerally the same, regardless of where you consolidate. You maywant to check first with the lenders that hold your currentloans.
If all your loans are with one lender, you must consolidate withthat lender.
If you decide to consolidate your student loans, remember thatyou can only do so once unless you go back to school and takeout more loans. Therefore, you will want to make sure you getthe best deal the first time. The interest rate will be the samefrom all lenders, but some lenders may offer future ratediscounts for prompt payment and a discount for having monthlypayments directly debited from your account.
Can my spouse and I consolidate our loans together? You canconsolidate your loans together, but it is not a good idea for acouple reasons:
-Both of you will always be responsible to repay the loan, evenif you later separate or divorce -If you need to defer paymenton the loan, both of you will have to meet the deferment criteria
When should I consolidate my loans? You can consolidate yourloans any time during your six-month grace period or after youhave started repaying your loans. If you consolidate during yourgrace period, you may be able to get a lower interest rate.However, since you will lose the rest of the grace period, it isa good idea to wait until the fifth month of the grace periodbefore consolidating. The consolidation process usually takes30-45 days.
This article is distributed by NextStudent. At NextStudent, webelieve that getting an education is the best investment you canmake, and we're dedicated to helping you pursue your educationdreams by making college funding as easy as possible. We inviteyou to learn more about how to get Student Loan Consolidation athttp://www.NextStudent.com .
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