Most people will tell you that the reason they decided to consolidate their student loans was simple. They wanted to have lower monthly payments. It is not uncommon for someone to have $500, $800, or even $1,000 each month in student loan bills. The opportunity to slash that monthly amount nearly in half is just too irresistible to pass up.
The student loan consolidation process allows you to extend the life of your loan, which gives you lower monthly payments. When you consolidate, you have more control over the repayment schedule. You can try to negotiate a loan period that better fits your situation. Student loan consolidation companies or lenders will have a variety of options to choose from. They will provide suggestions based on your financial situation, but you will have input as well. Once you pick a new loan period, you will be stuck with it for the remaining life of the loan.
Loan Period Options
The majority of federal student loans need to be repaid within 10 years. The government does offer a grace period from 60 days all the way up to 9 months before you are required to repay the money, but that grace period usually offers just a little financial relief. When you consolidate your federal loans, you have the option to extend the loan period anywhere between 12 and 30 years. However, you will most likely be required to have a minimum balance to extend the life of the loan. Here is a list that most organizations use to determine what your new term will be:
- If your loan balance is under $7,500, the life of your loan will stay at 10 years.
- Loan balances between $7,500 and $9,999 will be given a term of 12 years.
- Loan balances between $10,000 and $19,999 will be given a term of 15 years.
- Loan balances between $20,000 and $39,999 will be given a term of 20 years.
- Loan balances between $40,000 and $59,999 will be given a term of 25 years.
- Loan balances exceeding $60,000 will be given a term of 30 years.
Your private student loans are completely different from your federal loans. Private lenders have the option to set loan periods, so, consolidating private loans can give you completely different loan terms than you would get when you consolidate your federal loans. Most private lenders and consolidation companies will require a minimum balance between $5,000 and $7,500 to extend the life of the loan. Based on the dollar amount, you can have up to 25 or 30 years to repay the money. There may also be a little more room for negotiation when consolidating private loans.
Factors to Consider
You have no doubt heard the old adage that “If it sounds too good to be true, it usually is.” Having lower monthly payments is great, but there is a cost, and that cost can add up over time. The longer your loan period is, the more interest you end up paying. Before you agree to consolidate your loans, fully understand the long-term, financial impact of extending your loan period. In the short term it probably looks pretty good, but down the road, the picture may become more troublesome.
Just because you extend your loan period out to 20 years, does not mean you can’t pay the money back early. In fact, many people decide to extend their loan out 15 years in order to have a little wiggle room in their finances. As their career starts to take off, they decide to repay the loan five years earlier than originally anticipated. You do not have to worry about prepayment penalties if you repay your federal loans early. However, that isn’t always the case with private loans. Always check with your bank or consolidation company to make sure there won’t be any fees charged if you decide to pay back your private loans early.