Student loans can be overbearing, even after you’ve graduated and found a high-paying job. Many students accrue hundreds of thousands of dollars in debt from expensive post-grad programs and universities. For this reason, many students consider consolidating student debt.
What is Student Loan Consolidation?
Student loan consolidation is basically a process whereby a new lender pays off all or some of your existing loans and rolls the new debt into one, consolidated loan with one payment, and one set of terms. The idea is that the debt will be more manageable and the borrower will be less prone to default. Payments could be lower as well if your current student loans have variable rates.
Why Consolidate Student Debt?
There are a number of reasons why people choose to consolidate student debt, including lower fixed interest rates, lower monthly payments, new or renewed deferments, one single payment a month, and other incentives and flexible options.
That doesn’t mean debt consolidation makes sense for everyone. It really depends on your particular financial and life situation.
Do You Need to Consolidate Student Debt?
Before you make the decision to consolidate your debt, make sure it makes sense. If your student loan is already fixed, it’s probably best to stick with the current terms. You may also be able to extend the terms of your current loan without consolidating the debt, and if you stick with your current program, you may be eligible for on-time payment incentives that you’d otherwise miss out on.
Keep in mind that you can find student loan consolidation programs that lower interest rates when elect to make automatic payments from your bank account, and if you continue to pay on time year after year, you should see another interest rate reduction for solid payment history.
Subsidized Loans
With a subsidized, the borrower is not responsible for the interest while in an in-school, grace, or deferment status. Subsidized loans include Direct Subsidized, Direct Subsidized Consolidation Loans, Federal Subsidized Stafford Loans and Federal Subsidized Consolidation Loans.
Unsubsidized Loans
An unsubsidized loan requires that the borrower pay interest regardless of the loan status. Interest on unsubsidized loans accrues from the date of disbursement throughout the life of the loan. Unsubsidized loans include Direct Unsubsidized Loans, Direct PLUS Loans, Direct Unsubsidized Consolidation Loans, and Federal Unsubsidized Stafford Loans, Federal PLUS Loans, and Federal Unsubsidized Consolidation Loans.
Deferment and Grace Period
If borrowers graduate, leave school, or drop below half-time enrollment, loans made during that period have several months before payments are due. This period is called the “grace period.” And can range from 6 to 12 months after the student leaves school.
Deferment refers to the temporary suspension of a borrower’s monthly loan payment. Principal payments are put on hold, and interest is accrued only if the loan is unsubsidized.
Eligible Loans for Consolidation
Not all loans are eligible for consolidation. Here is a list of some of the more common federal loans that are eligible for federal student loan consolidation:
• Federal Stafford Loan (both subsidized and unsubsidized)
• Federal Direct Loan (both subsidized and unsubsidized)
• Federal Perkins Loan
• Health Professions Student Loan (HPSL)
• Nursing Student Loan (NSL)
• Federally Insured Student Loan (FISL)
• Auxiliary Loan to Assist Students (ALAS)
• Federal Supplemental Loan for Students (SLS)
• National Direct Student Loan (NDSL)
• Health Education Assistance Loan (HEAL)
• Federal Parent Loans for Undergraduate Students (PLUS)
• Loan for Disadvantaged Students (LDS)
Note that there are several different ways you can pay your student debt back, from fixed payments to “income-sensitive” payment plans.
Fixed payments require you to pay the same monthly payment until the loan is paid off. While initial payments may seem high, less interest is usually paid during the entire life of the loan.
Graduated payments typically begin with interest-only payments for a few years, followed by partial interest and principal, then interest and principal payments until the loan is paid off. This type of payment plan leads to a higher amount of interest paid during the life of loan in exchange for more flexible payments up front.
Income-sensitive payments are determined by your total monthly gross income and the amount of student loan debt. The payment will be no less than the amount of accrued interest, and usually has a cap so the payment doesn’t exceed “x” amount of your typical payment. Payments are adjusted annually and you must provide income documentation to the lender to set up this type of plan.
Extended payment plans are available to certain individuals under designated loan programs, allowing payments to be made over a longer period of time. Monthly payments are typically lower, but the extended period of repayment equates to more interest paid throughout the life of the loan.
Always shop around and speak with a professional before considering student debt consolidation. There are a number of pros and cons to consolidating student debt, and it’s much too complicated to list everything. Keep in mind that it’s more difficult to consolidate student loans with bad credit scores, just as it would be with any type of loan. And beware of interested parties and unscrupulous lenders who pressure you into making a decision. Take your time and make sure you’re comfortable with your choice before signing any documents.
