Student Loan Consolidation Definition

Student Loan Consolidation Definition

What Is Student Loan Consolidation?

Student loan consolidation is a course of by means of which you’re taking out a brand new loan, which is then used to repay your different current student loans. Instead of getting a number of loans and loan funds, you have got just one. You can consolidate all federal student loans and most non-public student loans.

The sum of money you’re eligible to borrow is determined by your faculty prices for a specific 12 months. If you graduate in 4 years, you’ll possible have 4 loans—much more, in the event you additionally took a personal loan for added funds.

Loan consolidation can merely your life, however you might want to do it rigorously to keep away from shedding advantages chances are you’ll at the moment have—or be eligible for—below the loans you have got now. But first you might want to make certain in the event you’re eligible to consolidate. Only then must you start searching for one of the best loan choices accessible to you.

Student Loan Debt: Is Consolidation The Answer?

Eligibility Requirements for Student Loan Consolidation

In most instances you’re thought-about eligible to consolidate your loans in case you are:

  • Not at the moment at school or are enrolled at lower than part-time standing
  • Currently making loan funds or are inside the loan’s grace interval
  • Have a superb compensation historical past (which means you aren’t in default in your loans)
  • Carrying at the least $5,000 to $7,500 in loans

While you do not want to fulfill any minimal for combining debt below the federal Direct Consolidation Loan program, non-public lenders and loan firms are inclined to demand a minimal loan steadiness. You can not consolidate non-public student loans with federal student loans, and you’ll solely consolidate the loans you maintain in your identify; which means you can’t consolidate your individual loans together with your partner’s or with loans your mother and father could have taken out to finance your faculty training.

Pros and Cons of Student Loan Consolidation

While the consolidation course of will simplify your life and make it simpler to be sure to are updated on loan funds, there are some negatives you might want to think about.

Pros

  • Streamlining your bill-payment course of

  • Extending your compensation time period

  • Lowering your rate of interest

  • Switching from a variable-rate to a fixed-rate loan

  • Lowering the month-to-month fee quantity

  • Getting into an alternate compensation plan

  • Graduated compensation (month-to-month funds begin low, then enhance)

  • Income-sensitive compensation (month-to-month funds are a share of pretax earnings

  • Getting borrower advantages

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Cons

  • Paying extra in complete curiosity

  • Having a bigger complete loan compensation quantity

  • Being in debt longer (in the event you lengthen your loan interval)

  • Losing borrower advantages out of your present lender (i.e. interest-rate reductions, rebates

  • Having to repay borrower advantages (i.e. rebates, charge waivers)

  • Possible prepayment penalties

  • Loss of grace interval on authentic loans, if any

  • If you consolidate a mixture of federal and personal loans, shedding the protections federal student loans present.

Advantages of Consolidating

Note that some consolidation execs apply simply to federal loans or simply to non-public loans. This is one motive that, when you’ve got each kinds of loans, chances are you’ll need to consolidate them individually (see under). Also: You may also at all times hold separate a single loan that has particularly good borrower advantages.

Applies to All Loans

Streamlining your invoice fee course of: With only one loan, you have got just one compensation due date to recollect and one examine to jot down.

Extending your compensation time period: With a brand new loan, you’ll be able to lengthen the period of time you must repay, usually between 12 and 30 years (up from the usual 10).

Lowering the month-to-month fee quantity: Lengthening the time period of your loan signifies that you can be paying much less every month.

Getting borrower advantages: Lenders will usually provide loan holders sure advantages (reductions for auto-payments, a document of on-time funds, and many others.) for being a superb borrower. If your lender doesn’t present any advantages, chances are you’ll need to think about consolidating your loans with a lender who does.

If you consolidate a mixture of federal and personal loans, shedding the protections federal student loans present.

Just for Private Loans

Lowering your rate of interest: If you have got a number of non-public student loans and have improved your credit rating since acquiring your loan, you might be able to qualify for a consolidated loan with a decrease rate of interest.

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Switching from a variable to a fixed-rate loan: If you have got non-public student loans at differing variable charges of curiosity, you might be able to consolidate and get one new loan with a set charge of curiosity—a superb transfer if charges have dropped considerably because you have been at school.

Just for Federal Loans

Getting into an alternate compensation plan: Consolidation could make you eligible for federal loan applications that make it simpler to repay your loans.

  • Graduated compensation permits you to start funds at a decrease month-to-month quantity, then step by step will increase that compensation quantity each two years.
  •  Income-sensitive compensation, which calculates your month-to-month fee quantity as a share of your pretax month-to-month earnings.

Disadvantages of Consolidating

The cons to consolidating your student loans apply to all kinds of loans.

Paying extra in complete curiosity: That’s since you’ll begin the loan compensation clock once more and it’ll most likely be for an extended time. Therefore, regardless that your rate of interest is similar or decrease, you will possible find yourself paying extra curiosity.

Having a bigger complete loan compensation quantity: More curiosity means your complete loan compensation will possible be increased.

Being in debt longer (in the event you lengthen your loan interval): As mentioned above.

Losing borrower advantages out of your present lender (i.e., interest-rate reductions, rebates): If the advantages are actually lush for a specific loan, you do not have to incorporate it within the consolidation.

Having to repay borrower advantages (i.e. rebates, charge waivers): Factor these, if any, into your consolidation loan’s complete value earlier than you resolve to consolidate, and which loans to incorporate within the combine. 

Possible prepayment penalties: Keep these in thoughts while you schedule your loan consolidation.

Loss of grace interval on authentic loans, if any: Student loans usually have a post-graduation grace interval earlier than you must begin repayments. Your consolidation loan most likely will not have this.

If you consolidate a mixture of federal and personal loans, shedding the protections federal student loans present: Investigate the federal Direct Consolidation Loan program to consolidate your federal loans.

Do the Loan Consolidation Math

You needs to be cautious if a personal lender guarantees to dramatically decrease your rate of interest by consolidating your federal student loans. The fact is that lenders weight the typical of the rates of interest you are at the moment paying in your current federal student loans after which spherical that quantity as much as the closest one-eighth of a share.

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While the rate of interest on the brand new loan could also be decrease than the upper rate of interest, it’s going to even be increased than the decrease rate of interest you are at the moment paying. So general you will be paying about the identical or maybe simply barely extra on your new, consolidated loan.

Here’s an Example

Marisa is paying 3.6% on a $3,500 Stafford loan and 6.8% on a $6,500 Stafford loan. If she have been to consolidate these loans, a legit lender would calculate her new rate of interest utilizing the next method: ($3,500 x 3.6%) + ($6,500 x 6.8%) / ($3,500 + $6,500) = 5.68%. This can be rounded as much as 5.75%. While the general rate of interest on the consolidated loan is lower than the 6.8% Marisa was paying on the $6,500 loan, it is considerably greater than the three.6% she was paying on the $3,500 loan.

Best Policy: Before you consolidate your student loans, crunch the numbers. Consider how for much longer it’s going to take to repay the brand new loan and the way far more in complete curiosity you’ll have to pay consequently. Weigh that towards the advantage of a decrease rate of interest, smaller month-to-month funds and having only one—not a number of—student loan funds to deal with every month.

Loan Consolidation Caution: Don’t Mix Federal and Private Loans

As talked about earlier, when you’ve got each federal student loans and personal student loans, it’s best to consolidate them individually, not collectively.

Private student loans lack sure protections. Combining them with federal loans will disqualify you from making use of for the advantages offered for federal student loans, equivalent to to extending the loan-payment interval , income-driven compensation plans, and federal loan forgiveness applications.

That would provide you with two loan funds per 30 days, which remains to be easier than 4 or 5 or extra of them. And that is earlier than you go to grad faculty…

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