A student loan consolidation refers to a combination of various student loans into one single, larger loan from a sole lender for settling the balances of the aforementioned student loans. A student loan can be either a federal or private education loan. Some lenders may allow the combination of several federal and private education loans into a consolidation loan. The time to consolidate the loans is when the repayment period commences or during the grace period. Interest rate of the consolidated loan is usually fixed.
The interest rate is the weighted average of all the interest rates that are being combined and later, rounded up to the closest one eighth of a percentage. For example, if X loan is $10,000 with an interest rate of 3.8 percent and Y loan is $5,000 with an interest rate of 5 percent, the weighted average is 4.24 percent. It is obtained by multiplying $5,000 with 5 percent and adding on to the multiplication of $10,000 with 3.8 percent before dividing the sum by the total of $5,000 and $10,000. The weighted average is then rounded up to 4.25 percent.
Benefits of Student Loan Consolidation
One of the key benefits of consolidating loans is when it comes to monthly payment. Instead of having to remember various due dates for different loan payments each month, there is only single due date to remember for making the consolidated loan payment every month. Also, there is a wonderful opportunity to select a more appropriate monthly repayment plan for managing your finances well each month. The standard repayment plan is usually 10 years.
Extended, income-sensitive and graduated repayment plans are some of the said alternative repayment plans. The extended repayment plan allows for an extension of 12 to 30 years, providing you with a lower monthly payment. But, the total amount of interest for the loan duration is higher. Graduated repayment allows for initial lower monthly payment before gradual increase of the monthly repayment which happens every two years or so. A specific percentage of your pre-tax monthly income is taken as monthly payment for the income-sensitive repayment plan.
Things to Consider Before Student Loan Consolidation
Before opting for a consolidated loan, find out if there is any prepayment penalty that is imposed by any of your current lenders for settling the loans early. Also, there might be benefits like a lower interest rate for good credit score that might be offered by your current lenders for your private education loans. So find out whether you lose or gain when you switch to a consolidated loan from a different lender. Consider carefully whether you are capable of paying the slightly higher amount of monthly repayment on time for your consolidated loan. Bear in mind that the total amount of interest for the consolidated loan duration is higher. Also, the total repayment amount is bigger.
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