Imagine that each month your mailbox is filled with student loan bills from eight different lenders. Each bill has a different interest rate, monthly due date, and different length of repayment. For millions of Americans, this is a reality. Most people do not take out just one student loan to cover their educational expenses. They use a combination of private and federal loans to cover tuition, fees, and books. In fact, it is not unusual for people to have between 5 and 10 different loans.
The monthly paperwork alone is enough to give you heartburn. Whether you make your loan payments online or through the traditional mail, it is a tremendous amount of information to keep track of. If you miss a payment, penalties might be charged which end up costing you even more money. There is a way to simplify this process. You may want to consider consolidating your student loans and paying just one large bill each month.
Combining Your Loans
The student loan consolidation process allows you to group your student loans together. One of the biggest benefits of consolidating is convenience. By consolidating all your loans, you will receive one bill each month. Initially you may wince at that dollar amount, but remember that this is the only student loan bill you will receive during the month.
During the consolidation process, you will also be given a fixed interest rate, and the repayment term may be extended. Basically, the entire payment process is streamlined for you. You no longer have to worry about making payments to eight different lenders. The consolidation company will distribute your money to them on your behalf. You no longer have to maintain a spreadsheet to keep track of what loan is due when and the impact variable interest rates have on certain loans. The process is straightforward. You know that each month for the next 20 years you need to set aside $200 for your student loans.
You will not be able to consolidate your private and federal student loans together. Private loans are offered through private banks and have different terms, interest rates, and conditions than federal loans. The benefits of combining federal and private loans also differ. Combining your federal loans is beneficial if you want to extend the repayment terms. Since the interest is already fixed, you will not receive a better rate. When you combine your private loans, you will be able to extend the repayment terms, receive a fixed interest rate, and possibly receive a lower interest rate based on your credit history.
Steps You Need to Take
As with any financial decision, you need to do a little pre-planning before signing up with a student loan consolidation company. Each company has their own twist on consolidating student loans and a unique fee structure. Here are a few steps you need to take before diving in and consolidating your loans:
- Analyze your financial situation and ask yourself if you really would benefit by combining your loans. Too many people get lured in when they hear they can have 20 or 30 years to pay back their student loans. That may sound good initially, but do you really want to have that debt hanging over your head for that many years? Only you can answer that question.
- Examine the paperwork for each of your student loans. Check to see if there are any conditions or terms that would prevent you from combining loans. Also, make sure you will not incur penalties for consolidating.
- Contact a variety of different consolidation companies and speak directly with an advisor. There is plenty of information available on the Internet, but this is a huge financial decision. Ask the advisor about the fees they charge to manage your account, how they calculate the fixed interest rate, and any prepayment fees they may charge.
- Companies do change their interest rates daily, but do not feel pressured to make a decision immediately. You need to analyze the materials they provided. Take the information they gave to you, and compare it to your financial calculations. Figure out how much more you may end up paying if the repayment terms are extended and the new fixed interest rate is applied. You must verify that this is a smart financial decision for your situation.