Student Loan Consolidation

The cost of higher education in this country, like virtually everything else, continues to escalate. The average college student has found it necessary to incur more and more debt in the pursuit of his or her academic degree. The repayment of this debt is generally deferred until after the student graduates or is no longer enrolled in classes, which is good. After graduation, however, payments must begin on the education loans that were received and this at a time when the student’s income, due to newness in the work force, is very likely to be at its lowest point.

Although not alleviated, this somewhat cumbersome problem can be significantly reduced by consolidating those student loans. As with other loan consolidation programs, all of the various education loans that were accumulated during the collegiate years (such as Stafford, Perkins, or even private loans, for example) are paid off with one new loan. This eliminates the problem of having to make separate payments at separate times for all of the loans that are outstanding, with each undoubtedly having varying interest rates and term lengths. The terms of the new loan can be negotiated with the lender to meet the budget requirements of the borrower. These consolidation loans typically have a repayment period of ten- to twenty years. Of course, the longer the term of the loan, the lower its monthly payment will be.

It makes perfectly good sense for recent college grads to assume that they will begin to earn more and more money as their careers progress. Consolidating offers the benefit of stretching out the loan payments in a way that takes advantage of that future earning potential. By extending the repayment term, the majority of the loan does not become due while the graduate’s income is at its lowest levels. Also, student consolidation interest rates are typically one- to two percentage points lower than the rates for the current loans. Add to this, as stated previously, the elimination of the accounting dilemma of paying for several loans at once and it’s quite easy to understand why consolidation has become a very popular option among college graduates. It does not, however, come without costs.

One problem with loan consolidation (of any sort) is that by extending the repayment period of the borrowed funds, the amount of interest that accumulates over the life of the new loan increases dramatically. In other words, the longer you pay the more interest you have to pay. Many recent grads fail to realize this, being concerned only with the new loan’s interest rate and monthly payment amount.

Loan consolidation fees must also be taken into account. While student loan consolidation is better regulated than most forms of refinancing, lenders still manage to add substantial fees to the loan which must be paid. Some may be negotiable; others are not. The prudent borrower should question and challenge all fees and charges that seem unnecessary or are simply not understood.

As with any other loan, the college graduate should diligently shop and compare the total costs of the new loan that he or she desires. All terms and fees must be evaluated; along with annual percentage rates (APRs) and the borrower’s own credit report. Only by having the “full picture” will the borrower be able to find the best possible loan program available.