If you’re a recent graduate or have attended a higher institution, chances are you could be facing a mountain of student loan debt. In a lot of cases you may also feel like there is no way out. Have you ever wondered if there is a solution or end to your student loan nightmare? Well, today we’re going to share a “silver bullet” of our own: student loan consolidation.
To have a better understanding of student loan consolidation, Here’s a crappy example I made up earlier today. It’s not that good (it’s crappy), but it should be able to make the topic a bit easier to understand:
Let’s say you are hosting a dinner party. To make sure things go off without a hitch, you need a caterer, bartender, servers, DJ and a cleaning crew. Researching and finding different companies to provide these services is often difficult, and can be time consuming as well. Not to mention the energy and frustration of negotiating the cost for their individual services.
To make things easier, you hire an event planner to find all the people for you. You tell the event planner how many people you need, your budget and the purpose of your event. The event planner is now the single point of contact, which you pay directly and they handle the rest.
While that may not have been the best example, that’s basically how student loan consolidation works. Simply put, going to college is one of the most expensive events that’s going to happen in your life. It’s hard to stumble across an individual that doesn’t need to take out several loans to cover all of the expenses. Now, student loans generally fall under two categories: Federal and Private, which we’ll explain below..
Offered through the U.S. Department of Education (DoE) Federal loans are considered one of the fastest and easiest types of loans a student can get their hands on. Private loans however, are obtained at financial institutions, such as your local bank. Regardless of the type of loan, you could wind up paying back different lenders with various payment due dates and interest rates, which can be burdensome. To make things easier, you opt for student loan consolidation, where you put all those debts into one “basket”, which means it’s treated as a single or consolidated loan.
This can be convenient because you make a single monthly payment instead of multiple payments. One thing to note, please do your research when it comes to consolidating your federal loans with your private ones. One reason is the interest on your federal student loans is tax deductible, while the interest on your private loans is not.
By combining the two loans into one, you lose the tax deduction benefit you would have received (if you consolidate your Federal loans into your private loans, and not the other way around). Two factors to help you determine if you qualify for student loan consolidation:
#1. You are no longer enrolled in school (graduated or dropped out)
#2. You have a positive student loan repayment history (your loans are not in default)
While repayment options can present both advantages and disadvantages, the intent of this post is to look at both sides of the “consolidation coin”. As with anything, there is more than one way to repay your loans, and we’d like to give you some additional points to consider during this process.
One disadvantage of consolidating your student loans (within the 6 month grace period), is that you are expected to begin making payments 2 months after your consolidation has been completed. Now this can put many borrowers in a pickle if you don’t yet have a job or are struggling to make ends meet.
One option is you can wait a few months and opt to consolidate your loans as you are nearing the completion of your grace period with your servicer. When you are 1 – 2 months away from your grace period expiring, you could begin the consolidation process. Another alternative is for you to move forward with consolidating the loans.
Based on your income, family size and other financial obligations you may qualify for a $5 or $0 payment per month. This payment amount would still count towards your repayment agreement. With COVID and millions of Americans out of work, Federal loan servicers should have placed all loans into “automatic forbearance” during this time.
What’s the advantage of consolidation (aside from its convenience)? Two advantages include: a lower interest rate and lower monthly payments. This is due to the loan payback period being extended for up to 30 years. When you graduate, you’re going to have to pay everything you owe back (obviously). So to make things easier for yourself, consolidate them.
We understand how confusing the student loan process can be, having taken out loans ourselves to pay for our education. The thing to remember is “how much” can I comfortably pay each month without living “paycheck to paycheck” because my student loans are as high as my rent or mortgage payment. If you are a borrower who has a mix of Federal and private loans, there are options available as well.
The first step is taking an audit of your total student loan balance. You want to know your interest rate and how much you owe Federal vs. Private. Once you have the current facts and figures, this will allow you to prepare a plan of attack to pay them down and put them in your rear view mirror. Schedule an appointment with us today, let us help you navigate through the process.
Related: 3 Reasons Why You Should Consolidate Your Student Loans
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