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2017~ Is Student Loan Consolidation Right for You?

2017-06-09 00:54 [LOAN] Source:Netword
Guide:Defaulting on a loan can damage a grad

Growing up is tough enough without the worries of your Financial future, so Money101  is here for you. E-mail us your questions and let us take off some of the pressure.

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College students are facing a harsh reality upon graduation: massive student loans and a feeble labor market.

For the first time ever, the amount of loans students took out last year crossed the $100 billion mark, according to the Federal Reserve Bank of new York. Outstanding student loan debt is expected to add up to more than $1 trillion in 2011.

Defaulting on a loan can damage a grad's Financial life, before it ever really gets started, making it essential for them to make a plan to pay off their loans.

There are many options for students to repay their student loan debt and some students may choose consolidation, combining their various loan amounts and interest rates into one monthly payment.

The interest rates on student loans vary by the type of loan and date of disbursement. According to Haley Chitty, director of communications for the National Association of Student financial Aid Administrators, the following loans are currently at these interest rates:

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•Unsubsidized Stafford Loans for undergraduate students and Subsidized Stafford Loans for graduate and professional students have a 6.8% interest rate (beginning July 1, 2012, graduate and professional students can no longer get Subsidized Stafford Loans. Subsidized Stafford Loans for undergraduate students have a different interest rate depending on when they were disbursed)

•4.5% for loans disbursed between July 1, 2010 and June 30, 2011

•3.4% for loans disbursed between July 1, 2011 and June 30, 2012 (the current rate)

•The rate is scheduled to increase to 6.8% for Subsidized Stafford Loans disbursed on and after July 1, 2012

•Federal Perkins Loans have a 5% interest rate'

•PLUS Loans have a 7.9% interest rate

To calculate interest for consolidated loans, the weighted average of the interest rate on the loans a student is consolidating is rounded up to the nearest 1/8% and is capped at 8.25%.

Because federal student loan regulations are constantly changing, the terms of students’ loans may depend on when the money was borrowed.

“People who borrowed student loans before 2006 may have gotten some federal student loans that were at very low interest rates,” says student loan expert Heather Jarvis. “The current prevailing rates are going to make a difference—[graduates] could lock in one of those low rates rather than waiting because they’re likely to go up over time.”          

It’s important for borrowers to understand whether or not they have variable interest rate loans, which can affect the timing for consolidation, says Jarvis. 

“They want to be clear on what their repayment options will be and they also will want to make decisions about which loans to consolidate if they have multiple loans because they can choose to consolidate them all or not,” she says.

For students with private loans, it can be more difficult to get a consolidation loan because not many companies still offer this option. Chitty explains that interest rates on private student loans are based on borrower’s credit score, but if a student’s score has improved significantly since the loan was obtained, that could lead to a lower rate.

Jarvis emphasizes that there are multiple benefits associated with federal student loans that are not available with private loans. Although some private loans may have a lower interest rate, they are usually loaned at variable rates. 

“[These rates] are low now, but often have no cap and are very likely to rise over time,” says Jarvis. “Those loans also don’t have the same borrower protections or flexible repayment options that federal student loans have.”

Although students can no longer consolidate their loans while still in school, Jarvis explains that they can take advantage of the “grace period” of their loan repayment--usually six months to a year after graduating. 

“If you consolidate your student loans, they do enter repayment status at that point,” she says. “You could end up forgoing some of your grace period and that may or may not be a good idea based on your circumstances.”

Pros of Consolidating Loans

For student with multiple loans from different lenders, consolidation gives them the advantage of having all of their loans in one place, simplifying the payment process by making one repayment per month instead of several, says Howard Dvorkin, founder of .

Loan consolidation an also give borrowers a longer term of repayment, which can be useful for students struggling to find work out of.

“If you owe up to $60,000 or more, you can have 30 years to pay--that’s a big reason why people would typically consolidate,” says Jarvis. 

Chitty points out that by consolidating federal loans, borrowers can become eligible for income-based repayment and possible loan forgiveness.

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