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Consolidation of educational loans

18.05.2021
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9 min.

The day students have been waiting for has come. They are walking across the stage in graduation caps and this make families be proud of them. Hard-earned diplomas are being handed, followed by applause and celebration.

Consolidation of educational loans

And after another piece of paper comes perhaps even before graduates have time to formulate their degree. But this time there is hardly any space for applause and celebration as this paper relates to the student loan and the lender wants to receive money back.

In case a student' dream has turned into an alumni's nightmare, it worth remembering that pretty many people face the same situation. According to the latest figures student loan arrears are now exceeding $1.5 trillion with an average debt sum hovering around $35,000.

While there is no magic solution for paying the debt on a student credit off, loan's consolidation might be a way to make things easier.

The idea of student loan unification

Consolidation goal is simple that means a borrower combines all credit payments into 1 lump sum. Ideally, this process results in a lower rate of interest as well as a shorter term.

Important! Technically, the only student loans type to be consolidated is Federal one. All remained, private in conjunction with Federal or just private, can be refinanced.

The important issue is that student loans unification isn't for everyone.

Two really serious things should be kept in mind prior to Federal loans for study consolidating. These are:.

1. Federal loans can be unified only once.

As there is only one chance for combining debts on Federal loans a credit holder should pay attention to this procedure. Before launching the process the number of loans as well as their rates and conditions are worth being doublechecked.

Important! Unification of private credits for education is impossible.

In some cases, Federal loans can be recombined. But generally, this is not the best way as unification can be executed if a client

  • Has new loans that were absent in the first package
  • Unable cover the Federal Loan's of Family Education charge.

Loan forgiveness seems to be a great deal but when considering the efforts it takes and a small number of people who actually get forgiven loans, it can become a really hard task to implement.

In case you are thinking of a graduate school or other degree it is recommended to avoid obtaining loans if possible. Firstly, you will find yourself in debt and secondly, will not be able to consolidate your credit.

2. Interest rates cannot be lowered upon Federal student credit's unification.

The advantage of such loans' unification is that a client shifts 2 or more loans to 1. Variable rates can also be applied and turned to fixed ones afterwards. It can definitely make budgeting much easier.

Important! Federal educational credits' combining doesn't result in lower rates of interest.

Normally consolidating can be only the reason for getting a monthly charge of a lower level but indeed it happens due to lengthening the loan term. A client pays less monthly but during a longer period which means that money can hardly be saved.

Types of student loans applicable for unification

Before visiting a bank (or start looking for loan consolidation companies) applicants should clarify what loans' kinds have already been issued in favor of them and whether the credits are suitable for consolidation.

Important! Only Federal loans can be combined for free with the government.

Federal student credits

Holding multiple Federal credits a client may be eligible for free of charge student loan consolidating via the Department of Education of the USA. Direct unification loan enables to compound all possessed Federal credits into 1 payment with a new fixed percentage (related to the weighted average of current rates of interest, rounded to the nearest 1/8 of a percent).

The advantage of direct consolidation credits is a fixed percentage. With a flat rate, monthly payments can be counted into a budget and thus, repaid without arrears.

Caution! No limit on the percentage rate is applied for direct consolidated loans.

Therefore, if a holder has to redeem high percentage rates now, a high interest will still probably be accrued after unification. A lower monthly charge securing can also mean that the repaying process may appear to be longer, in some cases even for up to 30 years.

Private loans for students

Provided you have private loans and are unable to combine with a Federal credit of direct consolidation. Indeed, a number of banks allow to unify private loans to 1 lump sum at 1 rate in interest. Since a rate is often dependent on credit rating, a lower score can lead to interest of a rather high level. In addition, percentage rates for such loans' are typically of a higher level than those offered with direct unifying of Federal loans.

However, the solution exists. If you are a holder of loans with a variable interest just clarify with the issuer the possibility of combining the credits at 1 new fixed rate.

Federal and private credits for students

Being an alumni you are likely to hold both Federal and private credits. Probably you have already encountered the difficulties of these types of loans' unification. If you want to combine private or mixed Federal and private credits into 1 then the process of refinancing has to be overcome.

Difference between combining and refinancing of educational loans

Combining and refinancing of such loans type are 2 totally different things. The idea of consolidation is in combining weighted average percentage rates on the loans existing to one only. During refinancing private or mixed Federal and private credits are taken out and essentially restarted. Private lender's service is needed to fulfill this procedure. Once a proper lender is found, they will pay the existing loans off and become the new lender.

Note! Refinancing might be a good option in case rates and payment terms are unbeneficial. The aim is to receive the most appropriate repayment terms and percentage rate.

If possible, applicants shouldn't agree on a lower monthly charge within a longer period of repayment or the one with a higher rate in interest as it can actually lead to an even larger repayment amount.

The same applies to a variable percentage rate because it changes depending on the market rate. An initially set low rate is not guaranteed to remain the same in six months.

Requirements for being eligible for educational loans unifying

In most cases, applicants are regarded to be eligible to consolidate credits if they are:

  • Currently out of school or enrolled part-time
  • Presently repaying the loan or the current validity of a grace period
  • Possessing positive repayment history holders (that means the absence of defaults on loans)
  • Going through the process of obtaining a loan from 5,000 till 7,500 dollars

While no minimum sums must be met for combining debts with the Federal program of direct unification, private issuers generally require a minimum loan balance. As long as combining private and Federal educational credits is impossible, the only way is to unify credits held in one name; this means clients cannot combine their own loans with those of their relatives, spouses, etc.

Benefits of consolidation

Please note that some of the benefits apply only to Federal or only to private credits. That is why clients are able to combine them separately as long as both types of loans have been granted.

Applies to all loans

  • Optimization of bills payment process: possessing just one loan a customer cares about only 1 maturity and 1 bill to be redeemed.
  • Maturity extending: being a new credit holder can extend its maturity frequently from 12 to 30 years in comparison to the standard 10.
  • Monthly payments decrease: increasing the loan term results in a drop of the amount to be covered monthly.

Perks for borrowers obtainment: loan holders are often offered certain benefits (timely payments accounting, discounts on auto payments, etc.). In case a lender does not provide any rewards then other issuers that grant such perks are worth being considered.

Along with unification of mixed Federal and private credits clients lose the protection that Federal education credits offer.

Applicable only to private credits

Interest rate cut: once a customer owns one or more private credits for students and has improved credit rating since the loan was issued then they may qualify for a combined loan with a lower rate of interest.

Shifting from variable to fixed rates credits: having private loans for study with different variable rates it is possible to consolidate and receive 1 new credit with a fixed rate. It can be really beneficial if variable rates are significantly rising.

For Federal loans only

Using an alternate plan of repayment: unification may qualify a customer for Federal loan programs that will make loans repayment easier.

  • Private loans do not allow specific protection. Unifying them with Federal ones will deprive you of the right to apply for Federal loan benefits like a plan for repayment based on income, extensions of a credit and forgiveness programs.
  • If you hold both types of loans for students then you should combine them separately.

It is better not to compound Federal and private credits

  • Protection provided by Federal loans is lost after mixed Federal and private credits' unification.
  • Grace period on initial loans loss, if any: credits for study often afford grace period that is applied after graduation prior to a start of redeeming. But this doesn't relate to all loans.
  • Potential penalties for early repayment: this issue needs to be kept in mind when planning consolidation of credits.
  • Loss of benefits for borrowers from the current lender: provide a particular loan grants really great benefits then this credit shouldn't be included in the list of those to be unified.
  • Being in debt for a long time this issue appears to be even more actual in case the loan term extension has been applied.
  • Having a bigger total loan sum: bigger percentage means the total repayment amount will most probably be higher.
  • Covering more interest: this can happen provided the loan repayment duration was extended as a result a client will have to pay off the bigger amount. Therefore, even if a percentage rate is the same or lower more interest will most likely be charged.

Disadvantages of consolidation

  • Repayment based on income means that monthly payment is calculated as a monthly income prior to taxes percentage.
  • Gradual redeeming allows to start with a monthly amount of a lower level and afterwards little by little increase this sum every 2 years.
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