People have trouble making their student loan payments, so they decide to go through the student loan consolidation process in the hope of getting a lower monthly payment. Before you start going down the path of consolidation, you need to ask yourself a question: What kind of repayment deadline will I be able to meet? Consolidating your student loans gives you the opportunity to change your repayment schedule.
If you currently have trouble meeting your repayment deadlines, what is to say that you won’t have trouble meeting these deadlines after you consolidate? Failing to pay your student loans has serious financial consequences. It can wreck your credit, making it harder for you to get loans, credit cards, and finance large purchases. Plus, it can impact whether or not you will be able to consolidate and what kind of interest rate you will receive.
Federal vs. Private
Let’s assume that you have had trouble making your student loan payments. Your erratic payments will be reflected on your credit report. If you had poor credit before you took out the loan, this will only make your report worse. However, that does not mean you won’t be able to consolidate your student loans.
You will be able to consolidate your federal loans even if you had trouble making repayments in the past. These loans are backed by the government, so the impact of defaulting is completely different than if you defaulted on a private loan. As long as you agree to once again make satisfactory repayments, you will be eligible to consolidate these loans. However, you may have a much higher fixed interest rate (capped at 8.25%) because of your credit problems.
Your inability to meet the repayment deadlines for your private loans can have serious consequences. In fact, it can disqualify you from consolidating. Private lenders assume all the risk when they loan you money. They are unlikely to work with you if you have shown that you are unreliable. If they agree to consolidate your loans, expect to pay very high interest rates. These rates help guard against some of the risk they assume.
Now, let’s assume that you have not skipped any of your loan payments. You want to consolidate to help lessen your financial burden. In fact, your credit history may have even improved a little. Most will find that they have little trouble working with lenders or consolidation companies. You may find out that you can even receive a slightly-reduced interest rate for your good behavior.
How to Pick a New Repayment Deadline
During the consolidation process, you will be asked to pick your new repayment schedule. The schedule will lengthen the life of your loan, giving you lower monthly payments, a new interest rate, and a new payment schedule. Lenders may restrict how long you can extend your loan based on the loan’s balance. Once you pick the new schedule, you will not be able to go back and make changes, so it is extremely important to review your financial situation to pick the right schedule.
One of the biggest mistakes people make consolidating is quickly picking a new repayment deadline. They are so focused on receiving a lower monthly payment that they don’t look at the overall financial impact this new payment may have. Remember, as you extend the term of your loan, you may also be increasing the amount of interest you end up paying. It may sound fantastic to have 30 years to pay back your graduate loans, but you have to ask yourself if you really need that many years to pay the money back.
The best way to pick a repayment schedule is look at your current financial situation and long-term goals. Calculate the amount of interest you will be paying under the new repayment schedule. Compare the new interest payment to your current interest payment. You want to improve your financial situation and credit history, not make it worse! Shop around to find the best repayment schedule for your needs. You will find that lenders and consolidation companies offer different repayment schedules, terms, and incentives.