Facts on student loan consolidation
The year students graduate from college is a time full of excitement as they search for their first jobs. While they step into the real world for the first time, they are also burdened with the heavy student loan debts accrued throughout college. This period can be especially stressful for borrowers with multiple loans that have high balances. The good thing is that the government has provided many repayment options including Student Loan Consolidation. Consolidation is a process wherein all of your student loans can be combined into one larger loan with a fixed interest rate.
Here are some facts about consolidation that you should keep in mind:
It is not always the best option for everyone.
Consolidation helps borrowers as it leads to fewer bills and payments to keep track of each month. It can convert older variable rate federal loans into one fixed rate loan, which can protect borrowers from having to pay higher rates in future. However, there are some reasons why it may not be beneficial for everyone:
When consolidating loans the terms and conditions of the consolidated loan will override the terms and conditions of the initial loans, and borrower may lose some benefits like interest-rate reductions or loan cancellation.
If the repayment plan is eligible for forgiveness after certain period, borrower can save money on the balance amount, but they will have to pay taxes on the amount forgiven.
It helps reduce the amount of monthly payments, but it can also extend the life of the loan and the borrower may have to pay more by the end.
Defaulted loans can not be removed from the credit history of the borrower,even after consolidation. A defaulted loan is a bad mark for the credit report of a borrower. Once a defaulted loan appears on your credit report it will stay there for up to seven years. Even if you repay the loan, go through loan rehabilitation, or consolidate the loan, your credit report will still show the negative payment history.
Most federal loans can be consolidated. You can even consolidate a single loan. However, there are few restrictions on consolidating a loan. One of such restriction is that a loan can only be consolidated once. To consolidate a loan the second time, you must add new direct or FFEL loans to consolidate with it.
Only loans from the same borrowers can be consolidated, that is why you can not consolidate a student and parent borrower’s education loan. Student loans can be consolidated only during the grace period or after the loans enter the repayment period.
Once the loans are combined into a Direct Consolidation Loan, they cannot be reversed. The loans that were consolidated are paid off and no longer exist.
With above information in mind, it is imperative that you compare the pros and cons of consolidation before making the final call.