Student Loan Consolidation What You Need to know

Student Loan Consolidation

The costs for college and university education continue to rise and many graduates have to bear huge debts on student loans long after graduating. Many reports on student debts show that more than two-third of all students graduating from colleges do so with some form of student debt. 

This worrying trend continues even when the graduates get employed since the starting salary of many fresh graduates can hardly cater for repayment of student debt. Repaying several loans, all with different payment times, structures and formulas can be a daunting task.

Student’s loan consolidation comes as an appealing option to cash-strapped graduates who seek to lower their monthly repayments or simplify their finances. Like any other financial arrangement, there are details to be considered before one takes on consolidation loans. 

For instance, which students loans can be combine, who can combine, and when is best to go for uniting or avoid combining? This is what you need to know about student loan consolidation.

What Is Student Loan Consolidation?

Students’ loan consolidation works more or less like mortgage refinancing. Several student and parent loans can be combined into consolidation Loan to form a larger loan from a single lender, which can then be used to offset other loans. Simply, merging the loans involve taking a new larger loan which is then used to pay off other existing students loans. 

Direct Loan unification program now handles all new federal education loans including merging loans since July 1, 2010. Although it is possible to concatenate all federal student loans and some private student loans, it is important to understand the pros and cons of consolidating student loans.

Who Can Consolidate Student Loans

Although both students and parents borrowers can combine their education loans separately, there are set eligibility requirements that must be met for one to qualify for consolidation loans such as:-

1. One must have graduated or if enrolled in school, status must be less than part time
2. Applicant must be making loan repayment currently or be within the loan’s (grace period)
3. Applicant must not be in loan default or must have good loan repayment history
4. One must have accumulated loans within the required range (usually $5,000-$7,500)

These are just some of the general eligibility requirements but there are more details to check for before you become eligible. For example, it is not possible to consolidate private student loans with federal student loans. While it is possible to do so under private loan, this is not advisable as you may incur high interest rates which may farther increase if repayment is not done on time.

Which Loan Can Be Consolidated?

If loan consolidation is your option, then it is a relief to note that any federal education loan, single or multiple, can be centralize. While this is so, there are set restrictions on consolidating a loan that has already been combined, Since 2006, it is required that if one is to consolidate a loan that has already been join  then loan has to add another loan which was previously unconsolidated. Private student loans cannot be combine with federal student loans.

A single consolidation loan cannot be consolidated to itself but two consolidation loans can be consolidated. Moreover, you cannot conjoin your own loans with hose of spouse or parents because you can only merge the loans that you hold in your name. Married students or students who get married in the course of their studies can no longer unite their loans since this provision was annulled in July 1, 2006.

When to Avoid Consolidation

Which Loan Can Be Consolidated?

While consolidation loan may look like a better option for financial arrangement, one should avoid it especially if the set conditions are not favorable. Some consolidators have strict repayment requirements that can lead to increased interest rates if they are not met. This can be very tricky considering that many loans take many years to repay. 

Federal consolidation loans come with bonuses such as forgiveness, cancellation opportunities and advantageous repayment. 

So, you may want to avoid private merging loans to take advantage of such extras. In some cases, it is better to keep loans separate since some borrowers target high interest rate loans where they can save some money by making accelerated loan repayment. This is not the case when several loans are consolidated since consolidation loans have single interest rate. 

Loan Repayment Plans

Besides the 10-years repayment plan which is the standard default repayment plan, federal education loans have other alternative repayment plans. All the other repayment plans have lower monthly payment than standard repayment plan but with longer repayment period and increased amount of interest repaid.

An applicant should note that if a repayment plan is not specified the standard 10-year repayment plan will be applied. 

Types of Repayment Plans

Standard Repayment: loan repayment is set on a fixed monthly amount for a loan term of up to ten years. $50 is the minimum monthly repayment.

 Extended Repayment: Depending on loan amount borrowed, this plan covers 12-30 years. Longer period can reduce monthly repayment but increase the total amount repaid.

Graduated Repayment: Depending on the amount borrowed, this plan takes 12-30 years.

The repayment starts on a lower repayment amount (not less than 50% of standard plan) and gradually increases (not exceeding more than 50% of standard plan) every two years.

Income-Contingent Repayment: this repayment plan is available to Direct Loan borrowers only and is based on the income of the borrower and debt amount. The plan has a 25 year term and the monthly repayment is adjusted as the borrower incomes status changes.

Income-Sensitive Repayments: This plan has a repayment period of 10 years and monthly repayment is based on a percentage of gross monthly income.

Income-Based Repayment: Introduced in 2009, this plan base monthly repayment on a percentage of discretionary income and is available in both Direct Loan and FFEL programs.