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Student Consolidation Loan also called Student Loan Consolidation, combines several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. Consolidation loans are available for most federal loans, including FFELP (Stafford loans, PLUS and SLS), FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans and Direct loans. Some lenders offer consolidation loans for private loans as well.
How Student Consolidation Loan Works
Consolidation loans often reduce the size of the monthly payment by extending the term of the loan beyond the 10-year repayment plan that is standard with federal loans. Depending on the loan amount, the term of the loan can be extended from 12 to 30 years. (10 years for less than $7,500; 12 years for $7,500 to $10,000; 15 years for $10,000 to $20,000; 20 years for $20,000 to $40,000; 25 years for $40,000 to $60,000; and 30 years for $60,000 and above.) The reduced monthly payment may make the loan easier to repay for some. However, by extending the term of a loan the total amount of interest paid is increased.
In certain circumstances (for example, when one or more of the loans was being repaid in under 10 years because of minimum payment requirements), a consolidation loan may decrease the monthly payment without extending the overall loan term beyond 10 years. In effect, the shorter-term loan is being extended to 10 years. The total amount of interest paid will increase unless you continue to make the same monthly payment as before, in which case the total amount of interest paid will decrease.
The interest rate on consolidation loans is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25%.
If a student consolidates their loans before they enter repayment, the interest rate used is the lower in-school interest rate. Thus, although the rounding up of the weighted average can potentially cost the student as much as 0.12%, a student who consolidates before entering repayment can save as much as 0.6%, a substantial net savings. (The in-school interest rate is 1.7% plus the 91-day Treasury bill rate from the last auction in May. During repayment, the interest rate is the 91-day T-bill rate plus 2.3 %.) An excerpt from the Federal Register and direct correspondence with the US Department of Education has confirmed this loophole. Additional details can be found in the interest rate loophole section.
Some graduate students have found it necessary to consolidate their educational loans when applying for a mortgage on a house.
What Is the Other Alternatives for Students
Consolidation loan simplifies the repayment process but does involve a slight increase in the interest rate. Students who are having trouble making their payments should consider some of the alternate repayment terms provided for federal loans. Income contingent payments, for example, are adjusted to compensate for a lower monthly income. Graduated repayment provides lower payments during the first two years after graduation. Extended repayment allows you to extend the term of the loan without consolidation. Although each of these options increases the total amount of interest paid, the increase is less than that caused by consolidation.
Unsecured Debt Consolidation and Students
Unsecured debt consolidation loans should be considered by people who meet two or more of the danger signs when it comes to financial difficulties. It is important to not ignore the danger signs or to slough them off as being irrelevant or unimportant. It is possible that for people who have at least two of these difficulties that serious financial problems could be in their future.
One of the first signs of financial difficulties is when people began charging essential items such as food and daily expenses to their credit cards in order to make life livable. This is very dangerous because of people are unable to provide things as simple as food, their spending has been out of control for some time and their financial priorities need realignment. The average citizen of the United States of America has 11 different creditors that they make payments to and if these companies require so much money that little to none is left for the necessities of life; a big red flag should go up.
More Signs Pointing to the Need for Unsecured Debt Consolidation
The next danger sign that should alert someone to the need for unsecured debt consolidation is when they make only minimum payments on their charge card accounts each and every month. Making minimum payments will have little effect on the balance and some credit card companies? base minimum amount due on spreading payments out over a 20 to 30 year period. Another thing to consider with credit cards is if an individual has maxed out all of their current credit cards and/or have too many credit cards.
Another warning signs as if an individual is unsure how much they go to creditors. People who have ever contemplated bankruptcy are also in need of some type of debt consolidation program. For people who meet two or more of these warning signs, it is important to take measures to get their financial matters under control.
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