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| When Should You Consolidate Student Loans? |
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If you have just graduated from college, the likelihood is that
you are
under a large amount of debt in the form of student
loans. You might be
wondering if there is any way to reduce the
amount you have to pay. One
solution for reducing your
debt is to consolidate your student loans.
Student loan consolidation is similar to refinancing a house on
better terms: although the principal of the loan will not be affected,
the interest rates you can lock in when you consolidate student loans
to
a fixed rate can be substantially better, reducing your monthly
payments by
up to forty percent. Plus, you might be able to stretch
out your payment
time to reduce your monthly payment amount
even further.
The
disadvantage when you consolidate student loans during your
initial
six-month grace period is that you must start making your
payments right
away. This can be difficult if you have not found
a job after graduation,
although you can wait until just before the
grace period ends to
consolidate, and still receive the lower rates.
Furthermore, once you have
consolidated your student loans, you
cannot un-consolidate them again, so
make sure to consider your
choice carefully.
How is Interest
Calculated When I Consolidate Student Loans?
When you consolidate student
loans, your lending company pays off
your government loan and issues you a
new loan under its own name.
The typical way to determine the interest rate
on the new loan is to
take the average interest rates on all of the student
loans, and offer
a new rate that is an eighth of a percentage point higher
(up to a
maximum interest rate of 8.25%).
Although agreeing to a
higher interest rate might not sound like a
good reason to consolidate
student loans, this rate is fixed over
the life of the loan, whereas the
government rates will fluctuate.
Since rates are at an all time low right
now, locking in the current
rates might be a good idea.
Furthermore,
many banks give you ways to bring down the
percentage rates. For example,
some lending institutions will
drop the rate by as much as a quarter point
if you agree to
automatic deductions from a checking or savings account,
whereas
others drop the rates after a certain number of timely
payments.
As an additional bonus, there is no penalty for paying
off your consolidated
loan early.
When Would You *Not* Want to Consolidate Student Loans?
Before you decide to consolidate student loans, you should
carefully
consider your alternatives. For example, did you
realize that it might be
possible to have your student loan
cancelled altogether? Student loan
forgiveness options include
volunteering, for the Peace Corps for example,
or working for the
government in a low-income area as a teacher or
doctor. Cancellation is not possible, however, after you have
consolidated your student loans. If this kind of work
interests you and
is available, it could be a better option than
loan consolidation.
Another time to hesitate before you choose to consolidate student
loans is when you are close to finishing your payments.
Stepping up the
payments and saving yourself some interest and
the hassle of consolidation
might be more advantageous
to you.
Finally, there are loans that you
might want to keep open because
they offer special advantages. For example,
if you are
considering going back to school and you have a Perkins loan, you
would not want to consolidate that with your other student loans.
The government will pay all interest on Perkins
loans while you are
in school, but if you have chosen to
consolidate student loans, you will not
be able to receive this
benefit. You could always choose to leave any
special
kinds of loans out of the consolidation mix, however.
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