Episode 124: August 30, 2011
Debt Loans Credit
By Laura Adams.
This podcast is for all you graduates or parents of graduates who have student loans.
Paying Off Student Loans Using Consolidation
Now, on to student loans. This topic was inspired by Stacey from St. Paul, Minnesota who sent me an e-mail. She writes:
I graduated last May and finished my student teaching this winter and finally started to look at student loan consolidation. None of the websites I've looked at can help me and I don't know where else to look. I've got at least $100,000 in student loan debt and I really want to make sure that I do this correctly! Please help!
Stacey, thanks for your e-mail. First of all, for those who may be unfamiliar with loan consolidation, it’s a strategy to help lower monthly debt. A loan consolidation allows you to lump together two or more loans into one new, bigger loan with a fixed interest rate. You can work with any lender you choose, and usually there are no loan consolidation fees. The lender pays off your existing loan balances and replaces them with a single loan, so you just have one monthly payment to make. Both students and parents can consolidate education loans; however, they can’t combine loans that are in different names. Only loans from the same borrower can be consolidated—even married couples must keep their respective education loans separate. And be aware that students can’t consolidate education loans while they’re still in school.
Loans That Can Be Consolidated
You can consolidate most federal student loans, but finding lenders that will consolidate your private loans is more difficult. And remember that if you only have only one student loan—whether it’s federal or private—you can always refinance it by itself. You can even re-consolidate a consolidation loan if you have at least one additional loan to add to it. And yes, to make matters even more confusing, you can consolidate two consolidation loans! But you can’t consolidate or refinance a single consolidation loan by itself.
The same repayment options that exist on underlying loans will also apply if you choose to consolidate them. Some types of loans such as federal Direct Loans and Federal Family Education Loans (FFEL) offer a variety of repayment options. They include extended repayment, graduated repayment, income-contingent repayment, and income-sensitive repayment. I’ll include a link to The Guide to Federal Student Aid in the show transcript at moneygirl.quickanddirtytips.com for more details on all these repayment options.
Consider the Overall Cost of Consolidation
Consolidation loans are very useful if you need to lower your monthly debt obligation. But many times they accomplish the monthly savings by stretching out the term of the loan, not by lowering your interest rate. The interest rate for a consolidation loan is a weighted average of the interest rates of your original loans, rounded up to the nearest one-eighth percent. So the interest rate for the new loan will be somewhere in the middle of the rates of your existing loans. That means you’re basically paying the same amount of interest for a longer period of time. So extending the term will cost you more interest in the long run.
Evaluate Your Options
Before consolidating, evaluate all the pros and cons. I’ll include a link to a loan consolidation calculator that compares the monthly savings to the increase in total interest expense over the life of the loan. Carefully analyze the cost of repaying your original loans against the cost of paying for a consolidated loan. It’s possible to get some of the benefits of alternative repayment plans that I mentioned, such as extended or graduated payments, without going through the hassle of consolidation.
Also consider any special features of your original loans. Borrower benefits such as forgiveness for public service work, forbearance for financial hardship, and certain interest rate discounts and rebates might be lost with a loan consolidation. So be sure to ask potential lenders about any loan options that you’d be forced to give up in doing a loan consolidation.
FinAid.org is a wonderful resource for all kinds of student aid information. They have a list of federal and private student loan institutions and lenders that specifically provide consolidations loans. You can also get a consolidation loan directly from the U.S. Department of Education at loanconsolidation.ed.gov.
There’s no penalty to pay off a consolidation loan early. So when you land the job of your dreams and start earning the big bucks, save yourself a bundle in interest by making larger student loan payments.
I’m glad you’re listening. Thanks for all your e-mail questions I’ve received lately. They’ve really inspired some great upcoming show topics. Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.
Debt Consolidation Calculator
Find your loan status and lenders at the U.S. Department of Education’s National Student Loan Data System at www.nslds.ed.gov
EdFund.org is a repository of federal Direct, Stafford, Perkins and consolidation loans used by some 350 colleges and universities.