Consolidating your student loans gives you the opportunity to have lower monthly payments. In order to get those lower payments, you will have to choose a new repayment schedule. You will have some say in the matter. However, your consolidator will ultimately decide which option is best for your situation.
You need to enter the student loan consolidation process with reasonable expectations. Many people get excited when they think that there is an opportunity to have an additional 10, 15, or even 20 years to pay back their loans. If you have a large amount of student loan debt and a low income, that may be the case. However, do not expect to receive 30 years to pay back $10,000. Companies will apply reasonable time limits to their repayment schedules.
Do not be surprised if your consolidator requires a minimum loan balance. This balance helps them decide which repayment plan is right for you. Remember, the longer you extend the life of the loan, the more interest you may end up paying. You want a plan that can give you lower payments, but not cost you a fortune in interest. This could mean picking a plan that extends the loan out five years versus 10 years. Here is a look at some of the repayment options consolidators may offer:
- Standard – The standard repayment plan requires that you pay your loan back, plus interest, within 10 years. Most student loans fall into this category. It may surprise some borrowers, but you may be required to stick with this standard plan even if you consolidate. Lenders are not likely to extend the repayment period if you have less than $7,500 in loans. The work involved and the extra interest you could end up paying just do not make financial sense.
- Extended – This repayment plan extends the life of your loan, giving you those lower monthly payments. Your loan can be extended anywhere between 12 and 30 years, depending on your loan balance. If you have a high loan balance, you will be given a longer time-frame to pay the money back. Each lender will use a slightly different scale to determine how much longer they will extend your loan.
- Graduated – You may be experiencing some tough financial times. Lenders do not want you to default on your loans. It is bad for their bottom line and your credit rating, so private lenders offer a graduated repayment plan that extends the life of your loan 12 to 20 years. Initially, you will have much lower monthly payments, but do not get too comfortable. As the loan gets older, your payments will begin to increase substantially.
- Income-Based – Federal student loans can be repaid under a variety of income-based repayment plans. Every year, you will have to prove that you meet the income requirements. These plans are designed to help borrowers with very low income and high debt ratios. Caps on monthly payments and loan forgiveness are just a few of the benefits. If you are already on these repayment plans, tell the student loan consolidation company. Consolidating may or may not void some of these provisions.
What to Consider
Once you consolidate your loans, you cannot go back and make any changes. Some lenders may let you add another student loan to the mix, but you won’t be able to subtract a loan. This makes your repayment schedule decision extremely important. You will not be able to negotiate again to come up with better terms or lower payments. If you end up defaulting on your consolidated loan, the financial consequences will be huge.
Your consolidator will most likely recommend a particular repayment schedule. Do not just accept their recommendation. Make sure that you can afford to make this new payment without any trouble. Ask them why they are recommending this plan. You want to make sure that they aren’t recommending a plan just because they will receive more interest payments from you.