Student Loan Consolidation-The Good, Bad, and the Ugly
With
tuition costs rising across the country, it has become increasingly necessary
for college students to take on debt in an effort to get their degree. But
student loan repayments are often difficult for students to make, especially
considering that early on graduates incomes are typically quite a bit lower then
their ultimate earning potential. Due to these circumstances, Student Loan
Consolidation is a valuable option for many recent college grads to pursue.
How Student Loan Consolidation Works Student Loan consolidation works like
most consolidation programs. A single lender takes on the various loans you have
accumulated, like Stafford, Perkins, HEAL, NSL, and private loans. While the
terms and repayment conditions vary among these many different lenders, a single
loan consolidation company will pay off all these loans and offer you a single,
typically longer term, loan. What this means practically, is that instead of
having to pay off one loan in 3 years, another in 5, and another in 10, or
having one loan's interest rate be fixed and another variable, all your loans
are compiled under a single system. You can then negotiate with your loan
consolidation lender, about the terms of the loan. Typically, students opt for a
repayment plan of 10 to 30 years. Obviously, the longer the term of the loan,
the lower your monthly payment will be.
Why Consolidate? Consolidating your student loans offers you the opportunity
to stretch out your payments, so as to take advantage of your future earning
power. It is quite reasonable for students to believe that they will earn more
as their careers progress, and by stretching out the length of their repayments,
they won't have to pay the most on their loan while their income is at its
lowest point. Another benefit of student loan consolidation programs is that
they take a lot of the confusion and problems out of student loan repayment. For
recent graduates who have loans from a variety of public and private lenders,
keeping up with the unique terms and conditions of every loan can often be a bit
of a nuisance. For these reasons consolidation is a very popular option. But
that does not mean that it is not without its costs.
Why Not Consolidate? Loan consolidation of any variety, is so appealing for
lenders because they can charge relatively high "consolidation" fees. While
student loan consolidation is regulated better than most forms, loan
consolidation companies still manage to add quite a bit to the principle of the
loan (that you will ultimately have to pay back) in the form of fees. One way to
avoid this is to insist that you be offered the opportunity to pay for ALL
consolidation fees upfront. By doing this, you can ensure that you will at least
be made aware of the quantity of charges being imposed upon you. Another problem
with loan consolidation is that by extending the terms of your loans (say from 5
to 15 years) you dramatically increase the amount of interest you pay on your
loans. Your interest payments on your loans accumulate over time. This means
that the longer you take to pay your loan back, the more interest will
accumulate. Many students fail to notice this, as they only focus on the
interest rate, and not the total amount of interest that will be paid over the
life of the loan.
Student loan consolidation is a valuable tool for students who want to defer
their repayments until they earn more or for those who find the nuisance of
maintaining many of their individual loans to be too troublesome. It is
important for recent graduates to consider, however, that these benefits,
despite what lenders may lead you to believe, do not come without negative
tradeoffs. By being aware of both the positives and negatives of student loan
consolidation, you can make more educated decisions about the whether student
loan consolidation is the right solution for you.
