Student loans are considered the next “bubble” the American economy will have to grapple with. As tuition costs continue to climb, the amount of debt that graduating postsecondary students carry is also booming. Recent graduates are emerging with an average loan debt of $27,000. With a difficult job market and heavy average debt load, it makes sense for graduates to consider student loan consolidation as an option. Consolidating student loans is not as simple as it seems, however, as there are rules governing the behavior of these loans.
The Benefits of Consolidation
Student loan consolidation offers numerous tangible benefits. First of all, converting what is likely a complicated mess of multiple student loans into a consolidated loan makes it possible for you to just have to deal with a single loan payment as opposed to several. Consolidated loan interest also allows for federal income tax deductions. Additionally, having a consolidated student loan allows for easier budgeting, since a single payment is going toward the overall loan balance.
To be eligible for student loan consolidation you must be current on your loans, not in default, and you must not be enrolled more than half time in school.
Another consideration in regard to the eligibility is the type of loan you have. Federally funded loans cannot be combined with private loans for consolidation. Additional debt, such as student credit cards, car loans and mortgages also cannot be consolidated with federal student loans.
Repaying the Consolidated Loan
Several different payment options exist when it comes to repaying a consolidated student loan. First of all, there are standard payments, which are fixed payments paid over a fixed period of time. Graduated payments are payments that gradually increase over the life of the loan. Income-based payments offer a variable payment based on the student’s annual income. The final payment option is extended payments. These are typically reserved for high-balance loans where payment is reduced but the loan term is extended to allow the student time to pay off the loan.
There are several things worth considering when deciding if student loan consolidation is worthwhile. The interest rate should be a consideration as this can add potentially thousands of dollars to a loan. Investigate whether the consolidated loan has an interest cap and what the minimum interest rate is. As with any loan document, it is important to read and understand the terms of the loan and to ask any questions that may arise in your mind.
Another consideration is that some lenders will charge a prepayment fee. Prepayment fees penalize debtors who actively seek to pay their loan off early. Consolidated loans are expensive enough without the added cost of such unwarranted fees, so you should certainly try to avoid lenders who charge these extra penalties.
While paying off your student loans certainly helps the economy at large, it is also of course beneficial for your credit rating, and paying off these loans with a consolidated loan represents bold action in moving toward and establishing a solid financial foundation. One final thought regarding consolidating federal student loans: These loans are guaranteed and allow lenders flexibility due to their guaranteed nature, so if you’re saddled with them, don’t hesitate to negotiate friendly interest rates and repayment terms.