Archive for June, 2010

School Loan Debt Consolidation – What Students Should Know?

Consolidation Loans incorporate several student or parent loans into one even bigger loan from a solitary lender, which is then used to settle the balances on the other loans. It is very similar to refinancing a mortgage. Consolidation loans are available for most federal loans…including FFELP (Stafford, PLUS and SLS), FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans and Direct loans. Some lenders offer private consolidation loans for private education loans as well. School Loan consolidation is among the most important and advantageous financial decisions recent graduates and former students can make.

Why Do Most Students Consolidate Their School Loans?

– To lower monthly instalment amounts by up to 45%

– To give them an opportunity to fix their credit score

– To make just one single student loan payment monthly

 

The Information on School Loan Consolidation Discounts.

 

The key reason why Lenders Supply Loan Discounts.

The Higher Education Act of 1965 sets the uppermost level of interest rates and fees on student loans. This helps protect loan gouging by student loan lenders, making access to student loans relatively easy for people who are are anxious for financial aid. Nothing, yet, prevents a lender from charging lower rates of interest and fees. (The illegal inducements regulations prevent lenders from providing immediate rebates, which would be similar to paying borrowers for their loans. Yet, most lenders work around these restrictions by instituting a 30 days delay in rebate discounts, or by providing the discounts when the loan enters repayment)

Lenders offer loan reductions for competitive reasons. Originally the competition was with the Direct Loan program. Still, with the repeal of the single holder rule, lenders are increasingly competing with each other for the highly profitable student loan market. If you presently have multiple student loans, you should get the proper information regarding consolidation of those loans.

What you Need to Know about Consolidating Student Loans

Chances are if you’ve taken out student loans in order to finance your education you have been, or at least will be, receiving calls and offers in the mail to consolidate your student loans. There are actually numerous advantages to consolidating your student loans. In addition to gaining a fixed interest rate you can also potentially lower your monthly payments. In the event that you begin to experience financial difficulties, you may also be able to take advantage of flexible payment options with a consolidated student loan.

Unlike other types of debt consolidation programs a student loan consolidation gives you the opportunity to combine your loans into one package with more attractive terms. You also don’t have to worry about being turned down because of a bad credit score and the interest on the loan may be tax deductible. In addition, in the event of your death your survivors won’t have to worry about paying it back because the debt will be discharged.

If you have a variable interest rate student loan, consolidating the loan can also help you to lock in a lower rate before the rates increase the next year. Over the length of the loan, this one step can actually help to save you a tremendous amount of money.

Of course, in addition to the advantages there are also some disadvantages of which you should be aware. One of the most important is that if you end up lowering your monthly payment you are actually extending the length of the loan and that means you’ll pay more over the life of the loan due to increased interest. You can still take advantage of the other benefits of a student loan consolidation without this disadvantage; however. Just don’t lower your payments unless it is really necessary.

When considering lenders for a student loan consolidation it is important that you always compare the terms of each offer made to you. Consider the interest rate and length of the repayment terms to be sure you are getting the best deal possible.

If you have a mix of both federal and private student loans, you should also be aware that while both types of loans are available to be consolidated it may not be a good idea to consolidate your federal loans and private loans together in the same package. There are stipulations on private loans that are not required on federal student loans, such as no deferments, no tax deductions on the interest, no forgiveness of the debt in the event of death and no forgiveness of the loan for working in certain fields. In the event of a mix of private and federal, it’s usually best to go ahead and consolidate the private loans separately from the federal loans so that you can retain those advantages for the federal loans.

By understanding all of the factors related to student loan consolidation you will be in a better position to make a more informed decision regarding your finances.

What you May Not Know about Consolidating Student Loans

Refinancing education loans can be so simple and attractive that many borrowers tend to overlook some critical points about student loan refinancing.  Sometimes what you don’t know can save you a great deal of money, time, and frustration.  Below you’ll find a few little know facts that can save you big bucks when refinancing your education loans.  

Consolidation Loans have a fixed interest rate versus a variable interest rate

Most education loans have a variable interest rate which can mean significant changes in the monthly payments if interest rates increase as they did on July 1st, 2006.  With a fixed interest rate, the monthly payments and total payoff balance is a set amount.  Some education loans such as the Perkins Loan and the HPSL (Health Professionals Student Loan) are fixed rate loans.  Before consolidating it’s important to weigh the repayment benefits of rolling these kinds of loans into the consolidation.

Consolidation lenders vary significantly in terms of money-saving incentives

What separates one lender from another when it comes to consolidating education loans are the types of incentives each offers.  Lender incentives can greatly reduce monthly payments and the total amount owed over the lifetime of the loan.  Many lenders offer incentives for auto-debit payments, but rarely more than .25%.   Another standard incentive is a 1% reduction in interest rates after 36 months of on-time payments.  When shopping for a lender to consolidate your education loans, look for one that goes above and beyond these standards.  ScholarPoint for example, offers an auto-debit interest rate discount of .50% and a 1% reduction in interest after only 24 months, a full year earlier than the norm.  

Your loans must be current in order to consolidate education loans

If you’re behind on your loan payments, you’ll need to get caught up before refinancing.  Once you refinance, you’ll most likely enjoy much lower monthly payments to ease your budget once you are caught up.  

Private education loans and federal education loans cannot be combined when refinancing

While federal student loans are funds lent by the government, private student
oans are those offered by independent lenders and tend to have a higher rate of interest.  Those who have both types of education loans will need to secure 2 different consolidation loans.  It’s best to consolidate federal education loans first and then start the process of consolidating your private education loans.  You can however, consolidate federal subsidized and unsubsidized loans together.  They do need to be tracked separately, but a quality lender will take care of this for you.

Your deferment and forbearance limits start over when you consolidate

One of the most important benefits of education loans is that they allow students to put their loans in to deferment or forbearance status during difficult times encountered while building their careers.  When you refinance, you are essentially getting a whole new loan, meaning that your deferment and forbearance limits are reset.  

Consolidating during the post graduation grace period allows you to lock in the lowest rate

Interest rates during the grace period (6 months after graduation) are .60% lower than after the grace period when loans move into repayment status.  Consolidating before the grace period is over helps to lock in this much lower interest rate.  It’s best to start the consolidation process soon after graduation to ensure that there is adequate processing time.  You can specify that your new consolidated loan begin at the end of your grace period so that you may enjoy both benefits.

Borrowers can no longer reconsolidate student loans

For many years, borrowers have had the opportunity to reconsolidate their education loans if they were unhappy with their lender or found a better loan offer elsewhere.  As part of the Federal government’s July 1st 2006 student loan changes, borrowers now face major restrictions when it comes to finding a new lender for already consolidated loans.  Unless you plan to take out new loans that would allow you to reconsolidate, it pays to shop around and find a lender you are going to be happy with because you only have one opportunity to consolidate.

Refinancing education loans is one of the easiest ways to lower monthly bills and make paying back your college education affordable.  Keeping these little known facts in mind can save you a great deal of money and make consolidating your education loans a smooth and simple process.

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