Odds are that you will not just graduate from college with a bachelor’s or master’s degree. You will probably graduate from college with a mountain of debt, too, courtesy of your student loans. The Project on Student Debt recently conducted a survey and found that the average college senior leaves school with $24,000 in student loan debt! That figure is expected to increase as tuition and fees continue to rise at schools across the country.
Huge amounts of student loan debt can significantly impact your lifestyle. You just spent four years in college working hard to earn a degree to help you break into a specific field. Instead of using a portion of your new paycheck to save for retirement, buy a new car, or put a down-payment on a home, you find yourself using most of that money to pay back those student loans. Remember, you are not just paying back the amount of money you were loaned, but interest, too. The interest alone can add hundreds or thousands of additional dollars to your overall total loan amount.
However, there is a way to ease your financial burden while giving you more time to repay your loans. More and more people are using student loan consolidation to help pay down their college debt. Many students use a variety of federal and private student loans to finance their education; each of these loans has different interest rates and terms. Consolidating allows you to combine all of your student loans together into one large loan. Instead of making fifteen different monthly payments, you now just make one payment each month.
People who consolidate their student loans may end up paying less than if they had paid off each loan individually. You will always be responsible for the amount of money you were loaned. However, a student loan consolidation company can help reduce your overall financial burden via interest rates. Many private loans have interest rates that are variable, meaning the rates change based on a variety of economic market conditions. Your loan may be charged an interest rate of 6.8% during the first three years, jump to 8.0% for five years, and then decrease to 7% for the remaining four years. These variable interest rates can significantly increase the amount of money you owe the lender. Through student loan consolidation, a company can negotiate a deal to charge the same fixed interest rate for each of your loans. A fixed interest rate will help you stabilize your finances and may ultimately help you reduce your overall financial burden. Plus, student loan interest is tax deductible.
Consolidating your loans will allow you to extend your repayment terms. If you are consolidating private student loans, you can have up to 25 years to repay an undergraduate loan, and up to 30 years to repay a graduate loan. Federal student loans often need to be repaid within 10 years, but with consolidation, you can extend those terms to 30 years. With a fixed interest rate and longer term, you have a little more financial flexibility and freedom.
You will have to consolidate your federal and private student loans separately. The federal government has a completely different set of requirements and interest rates for its loan programs than private banks do; however, the benefits of simplification, fixed rates, and longer terms are similar for both.
Make sure to do some research before you start the student loan consolidation process. Yes, these consolidation companies want to help you improve your financial situation, but they are also in the business to make money. Just as you would research a bank before taking out a home loan, do the same with these companies. Read up on their business reputation. Learn about any application fees or additional charges required to manage your account. Also, look at your own financial situation. It may sound great to have 25 years to pay off a loan. However, do you really need that long to pay off your student loans? If you are more than half-way through paying them back, consolidation may not make much sense. Calculate the revised interest rates and make sure it won’t end up costing you more in the long run to extend your repayment terms.