Posts Tagged ‘loan’

When Should You Consolidate Student Loans?

If you have just graduated from college, the likelihood is that you are under a large amount of debt in the form of student loans.  You might be wondering if there is any way to reduce the amount you have to pay.  One solution for reducing your debt is to consolidate your student loans.  Student loan consolidation is similar to refinancing a house on better terms:   although the principal of the loan will not be affected, the interest rates you can lock in when you consolidate student loans to a fixed rate can be substantially better, reducing your monthly payments by up to forty percent.  Plus, you might be able to stretch out your payment time to reduce your monthly payment amount even further.

The disadvantage when you consolidate student loans during your initial six-month grace period is that you must start making your payments right away.  This can be difficult if you have not found a job after graduation, although you can wait until just before the grace period ends to consolidate, and still receive the lower rates.  Furthermore, once you have consolidated your student loans, you cannot un-consolidate them again, so make sure to consider your choice carefully.

How is Interest Calculated When I Consolidate Student Loans?
When you consolidate student loans, your lending company pays off your government loan and issues you a new loan under its own name.  The typical way to determine the interest rate on the new loan is to take the average interest rates on all of the student loans, and offer a new rate that is an eighth of a percentage point higher (up to a maximum interest rate of 8.25%).  Although agreeing to a higher interest rate might not sound like a good reason to consolidate student loans, this rate is fixed over the life of the loan, whereas the government rates will fluctuate.  Since rates are at an all time low right now, locking in the current rates might be a good idea.  Furthermore, many banks give you ways to bring down the percentage rates.  For example, some lending institutions will drop the rate by as much as a quarter point if you agree to automatic deductions from a checking or savings account, whereas others drop the rates after a certain number of timely payments.  As an additional bonus, there is no penalty for paying off your consolidated loan early.

When Would You *Not* Want to Consolidate Student Loans?
Before you decide to consolidate student loans, you should carefully consider your alternatives.  For example, did you realize that it might be possible to have your student loan cancelled altogether?  Student loan forgiveness options include volunteering, for the Peace Corps for example, or working for the government in a low-income area as a teacher or doctor.  Cancellation is not possible, however, after you have consolidated your student loans.  If this kind of work interests you and is available, it could be a better option than loan consolidation.

Another time to hesitate before you choose to consolidate student loans is when you are close to finishing your payments.  Stepping up the payments and saving yourself some interest and the hassle of consolidation might be more advantageous to you.  

Finally, there are loans that you might want to keep open because they offer special advantages.  For example, if you are considering going back to school and you have a Perkins loan, you would not want to consolidate that with your other student loans.  The government will pay all interest on Perkins loans while you are in school, but if you have chosen to consolidate student loans, you will not be able to receive this benefit.  You could always choose to leave any special kinds of loans out of the consolidation mix, however.

Student Loan Consolidation Rates Has Increased on July 1, 2005

Congress voted on and passed Feb. 1 the Deficit Reduction Act of 2005 that included massive cuts to federal student loan programs. The $11.9 billion in student loan cuts, including changes in laws regarding student loan consolidation, will negatively impact those students seeking a college education and others seeking to consolidate their higher interest loans. The industry expects a rush of students seeking to consolidate at the current low rates that are set to increase on July 1.

The Deficit Reduction Act of 2005, S. 1932, was narrowly approved Feb. 1 by the House of Representatives. Passing by a two-vote margin of 216-214, S. 1932 was signed into public law Feb. 8 by President Bush, thereby approving the $11.9 billion in student loan cuts over the next five years.

Students and graduates now are in jeopardy. With college costs increasing every year and the forthcoming higher interest rates on student loan consolidation, college students are rushing to consolidate before the July 1 rate increase.

Student Loans Take the Hardest Hit

The cuts to federal student loans are the worst among cuts to other federal programs including Medicaid, Medicare and food stamps.

A majority of the legislation’s provisions to student loans will take effect on July 1 and others will be implemented over time. Some provisions include an increase to 6.8 percent for federal Stafford Loans, from rates as low as 4.7 percent. PLUS fixed interest rates will jump to 8.5 percent, from 7.9 percent. The legislation leaves consolidation loans current fixed rate in place.

Consolidate Student Loans Before July 1 Rate Increase

With student loan consolidation rates set to skyrocket on July 1, now is the time for students and graduates to consolidate, according to NextStudent, the Phoenix-based education funding company. Students and graduates now are urged to consolidate as current consolidation rates can be as low as 2.75 percent with benefits applied. Other incentives to consolidate include a longer payment term, one monthly payment and no prepayment penalties.

The following are other provisions affecting student loan consolidation that take effect July 1, 2006. Students and graduates should be aware of the new regulations so that they now can take action:

Consolidation Loan Changes
–    Single holder rule is not changed
–    Eliminates in-school and spousal consolidation options.  
–    A subsequent consolidation loan may be made in the DL Program only if the FFELP borrower wishes to obtain an income contingent repayment plan and, the borrower is trying to avoid default, but that is conditioned by the requirement that such a loan has been submitted to a guaranty agency for what used to be called “preclaims assistance” but is now labeled as “default aversion.”  
–    Also, in the Conf. Rpt. is a provision providing that only if a FFELP borrower has an application for a consolidation loan rejected by a lender or the application is rejected because the borrower wanted income-sensitive repayment terms, then the borrower can receive a direct consolidation loan.
–    A borrower with a defaulted loan can receive a DL consolidation loan to resolve the default.  
–    Unless otherwise specified the terms of DL consolidation loans are the same as FFELP consolidation loans.

Approval of the Deficit Reduction Act brings major cuts to student loans and a change in regulations regarding student loan consolidation. Although the legislation has changed to the detriment of those seeking a higher education, students and graduates still have the option to consolidate before the interest rate is set to increase on July 1.

Finding The Best Student Loan Consolidation

Student loan consolidation has many clear benefits, but before you obligate yourself by signing your name on the dotted line, you should do your research and obtain all the information you can find about the subject. In doing so, you will enable yourself to find the best student loan consolidation available. The following paragraphs will provide some advice and tips to help you find the best solution available for you.

Know Your Credit Score

If your credit score is good, you should not have any problems getting a great loan rate. If your credit rating is over 660, you will automatically qualify for the best student loan consolidation rates, and you do not have to research any more. But if your credit rating is under 600, you may want to evaluate ways to raise it before seeking loan consolidation. Your credit score is a main factor in determining the type of interest rate you may receive from the lender. If you have good credit, they can believe you will pay back the loan without default. Thus, they will often offer you a lower interest rate. But if your credit is not good, they will give you a higher interest rate to help insure they will receive repayment. If your credit is very poor, you may not even qualify for student loan consolidation.

There are several ways to obtain a copy of your credit report including:

· online requests
· written requests
· by requesting in person

Knowing your credit score is the first step in gaining student loan consolidation information. Knowledge is power. The more knowledge you have on the subject, the better chance you will have at obtaining the best rates from lenders. Knowing your credit score can also help you to rid your credit report of reports that should not be there, as well as aid in the prevention of identity theft.

Obtaining Information From the Internet

With the world wide web gaining in popularity and growing, it is a wonderful tool in helping obtain the best loan interest rates. Educating yourself on the subject has never been easier. By utilizing any search engine, you can generate vast amounts of information with just a few clicks of the mouse. There are many tools available online, to assist you in finding the best interest rates available. These tools include:

· free credit check links
· student loan consolidation calculators
· interest rate estimators

Knowledge is the key in finding the best student loan consolidation rates available. The more knowledge you have on the subject, as well as knowing your credit scores, the better your chances of getting a good interest rate when consolidating your loan.

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