With the average student loan debt as high as it is, it is important that you fully understand the potential ramifications of any decision that you make make before you make it. People often take loans out during college without thinking about them, and then once graduation comes there is a lot to take in at once. Something everyone hears about after graduation is loan consolidation, but what the heck is it? Here are some of the basics of what you should know before deciding whether or not to consolidate your loans.
More Than One Consolidation Option Exists
A student has several options for consolidating his or her student loans. Hundreds of student loan consolidation companies are currently competing with each other for business. Most of these businesses charge a monthly fee in exchange for reducing the interest rate of a person’s student loans and consolidate them into one bill. The average interest rate for a federal student loan is approximately 5.5%, but the average rate for a private student loan is approximately 10.5%. Consolidation companies can reduce your interest rate to the lower federal rate, and sometimes even lower.
A former student can seek assistance from Sallie Mae for help with federal loans. Sallie Mae offers five or six different options for student loan consolidations, and the company does not charge additional fees. Through Sallie Mae, if consolidation isn't an option, the student can opt to delay repayments by requesting a deferment or forbearance.
Consolidating Federal Loans
The type of loans that you have do matter when you are consolidating your loans. However, most federal loans may be consolidated together. For example, Stafford, Perkins, Direct Plus and Supplemental loans can all be consolidated with other federal loans. The interest rate that you will pay on your newly consolidated loans is an average of the interest rates on the federal loans you're consolidating. The government keeps you from paying extreme interest rates by capping the consolidation interest rate at 8.25 percent.
Private loans can generally only be consolidated with other private loans, and the interest rate on these types of loans can vary widely. If you choose the right time to consolidate your private loans, you may potentially save yourself thousands of dollars if you complete it at a time of low interest rates. However, this could mean that your interest rates may fluctuate over time.
While anyone is a candidate for loan consolidation, there are more restrictions on who is able to consolidate their private loans. The first hurdle that you have to make it over is passing a credit check. If you do not already have a high credit score, you may end up having to pay a higher interest rate than someone who does. Since many college graduates do not have any credit history, you may need a co-signer to be eligible for private loan consolidation. Many institutions do allow borrowers to release their co-signer if they make payments on time for a set amount of days.
Paying off student loans can be extremely difficult and confusing for people who have never had to make a loan payment in their life. The end of college sneaks up fast, and you may have issues after graduating if you do not prepare yourself to succeed right away financially. The best idea is to get a plan set in place that you can follow as soon as your loan payments start being due. If you follow the plan that you set, you will make your life much easier.
When you're looking to consolidate your debt, you should shop around for the program that best fits your needs.