Few college graduates leave the college education system without student loan debt. Many, sensing that the good times would never end, the nearly-free money wouldn’t stop coming from lenders, and that the day that they would have to pay back their loans wouldn’t come, borrowed far too much than they could afford to repay. Luckily, there are some opportunities for making a financial comeback against a large student debt burden. We’ll explain how to consolidate your student loans, reduce your monthly payments, and hopefully make the cost of financing your college education less expensive in the article below.
Consolidating Student Loans
First and foremost, it is important to recognize that there are two different types of student loan debt: Federal student loan debt, and private student loan debt from for-profit lenders. These two types are generally kept divided—you can’t consolidate a government debt with a private debt, and pay only the government.
Instead, you may have to conduct two different loan consolidations, or alternatively, conduct one large student loan consolidation whereby your federal student loan debt is merged with private debt in a new loan from a private lender.
Consolidating Federal Student Loans
Direct Loans, the name of the division of the Department of Education that is responsible for issuing Federal student loans, has an excellent program for debt consolidation of wholly-public debts. Known as a “Direct Consolidation Loan,” students can borrow enough to satisfy multiple student loan debts, thus creating one monthly payment and interest charge from a myriad of individual loans.
Loan consolidation programs from the Department of Education’s consolidation program do have some downsides, which vary in depth. Most importantly, know that a debt consolidation program is essentially a refinancing program. To consolidate, you essentially borrow through a new loan in an amount that is large enough to allow you to pay off your current debts. From then on, you need only make one payment to pay off the new loan.
Consider carefully the following options:
Loan duration – One of the most common reasons for consolidating student loans is to extend the length of the loan from the standard 10 year loan term to a length as long as 30 years. While making the extension does mean you’ll pay a smaller monthly payment, which may help in boosting cash flow for the jobless or recently graduated, you will pay a greater total amount of interest. This is because the consolidated loan will compound for 30 years instead of 10, which makes the laws of compound interest work against you. This is the main qualifier for consolidating federal student loans as you should avoid the process entirely unless you need a lower monthly payment, even if it means paying on the debt for longer than you had originally intended.
Borrowing benefits – The Direct Loan program has a number of subsidies, benefits, and awards for people experiencing financial hardship or otherwise in need of lower cost borrowing mechanisms. By opting for a student loan debt consolidation program, you may find that the cost of paying for your loans may rise significantly as many off these benefits are not extended with the new loan. Additionally, interest rate discounts, loan cancellation offers, or principal rebates that do not carry over are reflected in your personal finances as a higher total expense. Again, it would be recommended that you do not consolidate Federal student loans unless you absolutely have to, and more importantly, that you do not consolidate if you have excellent borrowing benefits built into your loan.
No reversal – Once your student loan debts have been consolidated, there is no way to unwind the decision. The debt amounts that are consolidated are paid off in full, and a new loan of an equal amount takes its place. Thus, consolidation programs are not intended as a short term solution, as the short-run benefits may be outweighed by long term costs.
So now that you know the why, what, and how to consolidate student loans, it’s time to start thinking about your options in reducing your monthly payments. There are a few other, short-term options which may work better than a total loan consolidation:
1. Deferral – You may defer your loans for a period of three years or more pending that you meet certain qualifiers. Based on the federal poverty level by family size, those with significant student loan debt can defer payments for up to 12 months, and can reapply for deferral twice, for a total period of 36 months of payment deferral.
2. Forbearance – Forbearance is an excellent option for those who do not qualify for deferral, but who do need more time to work out their budgets and push off their monthly payments. Forbearance can be requested for a period of up to 3 years or 36 months, and must be renewed every 12 months if the borrower wish to continue pushing back their payment dates. With forbearance of federal student loans, the interest on the debt continues to compound as payments are not made, and you will exit forbearance with more debt than you had at the beginning for this very reason. However, in the case of disability, unemployment, or other hardship, loan forbearance is an excellent choice to shore up your personal finances and loan balances.
Consolidation of private student loans is far easier than loan consolidation of public student loans. Generally, the biggest risk to your loans is that you have a higher interest rate, since rates may have been lower at the time you originally signed the contract. The process for private loans varies by lender, though each should be more than capable to provide you with a consolidation that mirrors that of a federal student loan.