Loan Consolidation: Is It Right for You?
by Tiffany Young
With all the stress and worries of tests and papers,
theres no time to worry about financing college.
Get your finances straightened out this summer, before
classes start back, so that you can spend all your time
like you should: buried in books.
What is Student Loan Consolidation?
Loan consolidating can be very confusing. Postcards
that come in the mail saying Consolidate Now!
can make it seem like a brainless endeavor, but
what loan consolidation actually means to your finances
in the long run is a puzzle to many people.
Loan consolidation is when several different loans
are paid off by one vendor, who opens a new loan. This
new loan allows you to pay just one bill instead of
several different loans, possibly, from several different
lenders. There are benefits to consolidating debt, but
there can be drawbacks, too. Depending on your own situation,
you will need to discover whether consolidating loans
or keeping loans separate is the best way to go. But
dont wait until sometime down the road to consolidate.
If you decide that consolidation is the best option
for you, do it now. Consolidation rates are at record
lows through June 30, 2005. On July 1, 2005, interest
rates for students in college or still in their six
month grace period will rise from 2.77 percent to 4.66
percent. Rates will rise from 3.37 percent to 5.26 percent
for student borrowers already making payments.
|Rates for Loans in Repayment
(Source: Sallie Mae)
Benefits of Consolidation
One benefit of loan consolidation is the simplicity
of paying one monthly bill and knowing that all your
debt is through one financial lender. There is no need
to have seven different addresses and banks, to which
you must keep up with and send out bills on a monthly
basis. The monthly payment is usually much lower on
consolidated loans than individual loans. If you decide
to consolidate, they will take all your loans together
and then give you a few options on how fast you want
to pay them back.
If you are still struggling with getting a job, then
there are options that take this into account. For example,
you can pick an option that has a smaller monthly fee
for the first couple of years while you get started
on your career. Then the monthly fee increases on the
assumption that you will have your finances in order
and be making more money than you had been when you
had just graduated. While this is great for students
who are young and have very little income coming in,
many students going back to college may have a spouse
to help them repay their loans.
If you can afford paying a higher monthly payment for
your student loans each month, you should. That way
you can pay off your balance sooner and avoid paying
more interest than you have to. Consolidated loans also
allow you to pay more than your monthly balance without
incurring fees. So if you have extra money one month,
say your income tax refund, you can apply it to your
student loans and pay the debt off quicker. And the
best thing about loan consolidation is that you can
generally get a lower fixed rate for your consolidated
loans than on individual loans. A fixed rate means that
they wont increase your rate later on as inflation
rises. This generally works in your favor, since rates
tend to increase as time goes on. Come July 1st, rates
are will rise so, locking in a low interest rate now
would do you good in the future.