How to Consolidate Student Loans
The high payments associated student loans can be quite overwhelming. This is especially true if a person is paying off more than one loan at a time. For this reason, many people merging all of the loans into one payment by consolidating them. Essentially what this means is that just one financial institution would buy out all the loans, thereby creating just one payment, to one lender. Debt consolidation is nothing new and many people have turned to this method of tidying up several loans into just one loan. The same method of debt consolidation can be used to refinance student loans. This is also helpful in creating just one interest rate, rather than a number of different payments with a different interest rate attached to each.
Making the Decision to Consolidate
Even though many people may find student loan consolidation useful, there are also a number of things that should be considered which may not seem that attractive to some people. There are always ups and downs to any sort of debt consolidation and consolidating federal student loans or private student loans is no different. There may be reasons that a person may choose not to consolidate. Most debt consolidation loans are taken out at a fixed rate, with this being said, a lower interest rate when the market is good will be a very nice aspect. However, if the interest rates should ever happen to plummet, the person paying the fixed rate will never feel the lower rate. They will continue paying the fixed interest rate whether it is above, or below the market rates. In addition, when a person consolidates any loans they are essentially taking out a brand new loan. In this way it might actually be more detrimental in the long run, as it actually lengthens the life of the loan.
If a person has weighed out the options and has chosen to go with student loan consolidation then there are some things he/she should do prior to jumping into another loan. Researching the correct lender is crucial. It is important to review each lender and the services they offer. Remember that each will carry a different interest rate, as well as a different set of payment requirements and so forth. It is never a good idea in financial matters to act impulsively. In addition, there are a number of private lenders who have stopped consolidating student loans, a little homework will be necessary in obtaining one that will still offer this service. By asking a lot of questions and gathering a lot of information, a person may save themselves the headache of yet another loan nightmare. No one wants to be taken out from under bad loans and spiraled into another
A Word on Consolidating Federal Student Loans
Once a lender has been chosen it will be best to begin by consolidating federal loans first. The interest rate on consolidating federal student loans is often quite a bit lower than that of consolidating private student loans. Typically a lender will find your interest rate by calculating an average of the current loans interest rates and then round those numbers up to the closest 1/8, however, this cannot exceed 8.25 percent. The interest rate will also depend largely on what the original interest rates were on the loan when it was first taken, as well as the type of federal loan it is. The best time to consolidate is just after graduation when many lenders will not have begun pushing for repayment yet. The reason for this is that many times a lower interest rate can be locked in at this time. It is also important for someone who is considering federal loan consolidation to remember that turning these into a private loan could be detrimental as it will take away many of the privileges seen in federal loans.
Private student loans are often ideal candidates for consolidation because a student is apt to have a much higher credit rating now than at the time the loan was taken out. This could result in the student being able to use the same lender in order to consolidate, and at a much lower interest rate. If for some reason the interest rate being offered is not attractive, a little bit of shopping will almost always secure a lender that does have an appealing interest rate.