Danielle BonkAn increasing number of college students are finding it difficult to pay for college without taking out
student loans. Some even require more than one. Student loans are different from grants or scholarships in that they must be paid back. There are several types of loans, which can generally be split into two categories: federal and private. Federal student loans can be made to students’ parents, often giving them a higher limit but requiring immediate payments, or directly to students. Loans directly to students give a restricted limit but allow for a grace period of 6 months after graduation or if one’s class load drops below part time. A private student loan can also be made either to parent or student. However, it usually gives a significantly higher limit than federal loans, requires no payments until after graduation, and accrues interest immediately.
Individuals take out student loans to cover a variety of college-related costs, including tuition, computers, room and board, books, and other required class supplies. As the cost of tuition and supplies rise, the need for students to receive more than one student loan grows. Within a few months of graduating, most of these borrowers must begin paying back their loans, which sometimes have already accumulated interest. With the average college graduate making entry-level earnings, many find themselves under a pile of accumulating debt within the first year of graduation. It is because of this that so many college graduates turn to
student loan debt consolidation.
Student Loan Debt Consolidation
Most federal loans can be consolidated, including FFELP, FISL, Perkins, HEAL, Health Professional Student Loans, Guaranteed Student Loans, NSL, and Direct loans.
By definition, student loan debt consolidation consists of a lender grouping together one’s various loans into one larger loan with a fixed rate. By doing this, the debtor simplifies his or her bills—of varying rates, amounts, and due dates—into one single bill. He or she can also possibly get late fees waived, which frees up money to pay bills. A debtor’s new fixed interest rate is taken from the average of all the student loan rates being consolidated, with a maximum of 8.25%. The debtor can choose which and how many of his or her student loans to submit for consolidation. In this way, a debt consolidation loan can reduce one’s interest rate. Since the rate is fixed, if rates should go up, the debtor would continue to pay his or her lower rate, thus saving money in the long run. Plus, these federal consolidation loans can be extended for up to 30 years, allowing a debtor to have lower monthly payments—some companies claim by as much as 50%.
There are, however, risks a debtor takes by opting to consolidate debt. Spreading out one’s debt over time may increase the time it takes to pay back one’s debts, making the total cost higher than the original amount. Also, the fixed rate plan may backfire. If rates should go down after one secures a fixed rate loan, the rate does not change for that person, and so he or she will go on paying the higher rate for the remainder of the loan.
Student Debt Consolidation
People should judge carefully the decision of whether or not to consolidate student loans. They should be aware of the terms of a student loan debt consolidation and consider the long-term effects it may have. Students and their parents should talk to professionals and calculate the pros and cons of such a decision. Taking these precautions, a well-informed consumer has a good chance of getting his or her financial life back on track.
