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For many of the 44 million young Americans saddled with significant student loan debt, the choice to consolidate student loan obligations can make a lot of sense. Student loan consolidation not only offers the opportunity to simplify the monthly payment process through one streamlined payment per month, but it can also relieve a measure of financial pressure by reducing the overall monthly payment. Let’s take a look at both the advantages and drawbacks inherent to student loan consolidation.
Federal Student Loan
Student Loans take the form of either Federal or private loans, and it generally makes sense to pursue consolidation of these two categories independently of each other. In the case of Federal student loans, the Direct Consolidation Loan program offers the opportunity to lower overall monthly payment expense while also reducing the number of payments made to various creditors down to one single payment. Because Federal Student loans carry fixed interest rates, there is no reduction in rates when consolidating – in fact, the new blended interest rate actually rounds up slightly to the nearest eighth of a percent. However, the convenience associated with the streamlined process of making only one payment instead of keeping track of many different payments per month represents a nice practical improvement.
Consolidation Offers Flexible
Even more importantly – and especially for those student loan debtors who may not be generating as much income following graduation as they had anticipated – consolidation can reduce the regular monthly payment considerably. Payment plans can be structured according to income level, so if a borrower’s income is low, the required payment can be reduced sharply. However, this reduction comes at a significant price. Even though the monthly payment gets reduced, the principal amount owed on the loan does not. Accordingly, the amount of time that it will take to fully repay the loan gets stretched out, and this results in higher total interest expense over the life of the loan. However, when an individual’s income level strengthens, repayment terms can be adjusted in the other direction toward a higher monthly payment, and this will help mitigate total interest expense over the life of the loan.
Private Student Loan Consolidation
In the case of private student loans, interest rates are variable and generally higher than those attached to Federal student loans, as private student loans are granted based upon the borrower’s credit score and profile. Therefore, when consolidating student debt private loans following graduation, in some cases, a debtor may actually secure lower interest rates, particularly when income levels are higher and the credit profile is strong. It should be noted that private loans cannot be consolidated within the Federal Direct Consolidation Loan program – they can only be consolidated through private institutions such as banks, credit unions and college foundations.
However, some private lenders will allow Federal loans to be consolidated with private loans, but because Federal student loans typically carry lower interest rates than do private loans, consolidating the two types of student loans debts together will often make less financial sense. Furthermore, when consolidating Federal loans through private lenders, any opportunity to participate in forbearance or deferment, as well as any eventual Federal loan forgiveness programs, is permanently lost.
Student Loan Consolidation and Credit Profiles
All student loans – regardless of whether they are Federal or private – are a form of unsecured debt and are not collaterally backed. Much like unsecured credit card debt, student loan obligations represent an opportunity for the debtor to build a strong credit score and profile through making timely monthly payments in a consistent manner.
Additionally, by reducing the total number of creditors, the process of student loan consolidation enhances a credit profile even more. Furthermore, consolidation also offers the opportunity of shifting any previously defaulted upon student loans back toward good standing. Given the flexible repayment options that student loan consolidation offers, this provides the debtor a clean slate on these loans, as well as the assurance that defaulting again on any student loans and incurring ensuing credit profile damage will be highly unlikely.
Make Things Easier on Yourself
If you have any questions or require assistance with the student loan consolidation application process, contact us here at United Settlement. Based on the amount of debt you presently carry and your income level, together we will evaluate your options and determine which of your student loans may qualify for consolidation. We’ll help you review various repayment plans and carefully assist with all required paperwork. With student debt consolidation, the convenience of making one streamlined and lower monthly payment on your student debt could represent the financial flexibility that you’ve been looking for to bring you increased peace of mind and a better quality of life.
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