Frederick Jace
If a borrower with private student loans checks his credit and sees that it has improved 50 points or more, he should consider getting a private student loan consolidation. A borrower who needs to lower the monthly payment on his private student loans should also consider a private consolidation loan into a lower single monthly payment.
Lower Interest Rate
Private student loan consolidations are credit based loans. Although the interest rates from private student loan lenders are mostly identical from lender to lender, they are determined based upon the borrower’s credit score. This means a borrower’s improved credit score may lower the interest rate existing private student loan balances.
Another strategy to lower the interest rate is to add a co-signer who has a better FICO score than the student borrower. Although finding a willing a co-signer with excellent credit can be very hard to find, it could result in thousands of dollars worth of less interest paid.
Lower Monthly Student Loan Payment
Consolidation resets the clock on private student loans, which can lower monthly payments by extending the term of private student loans by up to 30 years. Depending on the repayment options offered by the lender, monthly payments can further be reduced with other repayment options. For example, the graduated blackjack repayment plan lowers the early payments further while increasing the size of later payments. Although interest rates are generally the same from lender to lender, differences in repayment plans can decrease monthly. It differs from case to case or person to person.
Another benefit of consolidating is having to send only one payment per month for all private student loan balances instead of sending multiple payments every month to each lender. This is one of the greatest advantages for many who are on job and get salary at the beginning of each month.
A lower monthly payment improves the borrower’s debt to income ratio, which may allow the borrower to qualify for other loans, such as a mortgage.
Disadvantages of Consolidating
There is a couple of significant disadvantages of private student loan consolidation. Although private student loan consolidation is usually beneficial, there are a few disadvantages to consolidating.
- Extending repayment of student loans may increase the total amount of interest paid over the lifetime of the private student loans. However, students may pay additional amounts over the minimum monthly payment to help payoff the loan sooner.
- If the borrower’s credit is worse at the time of the consolidation, the interest rate on a consolidation loan could be higher than the original private student loans. The higher interest rate will make borrowers pay more money in the long run to payoff the consolidated student loan, even if the consolidated loan resulted in a lower monthly payment.
- Finally, if adding a co-signer was necessary, the co-signer is now on the hook for the consolidated student loan for up to 30 years. A default of the consolidated student loan will negatively affect two people instead of just one.
Depending on each borrower’s situation, getting private student loans consolidated could be quite advantageous, but it needs to be weighed against the disadvantages that are not always apparent.
Benefits of Federal Student Loan Consolidation
We have just discussed some pros above. Here is a detailed explanation of the benefits. There are several benefits of federal loan consolidation. Students and graduates can become overwhelmed and confused by trying to manage the repayment of multiple federal student loans. Obtaining a federal student loan consolidation can simplify debt management by creating a single monthly payment and providing other benefits. Applying for a consolidated federal student loan is a simple process that takes approximately 30–90 days.
Combine Multiple Loans Into a Single Monthly Payment
A consolidated federal student loan converts the combined, accumulated debt from several individual loans into a single loan that can be managed with one convenient monthly payment. This new, simplified loan eliminates the need to keep track of multiple payments due at different times of the month.
Reduction of Monthly Payment Amounts
Consolidated student loans can also ease cash flow by reducing the borrower’s overall monthly payment. This can be achieved through a combination of an extended repayment timeframe and potentially lower interest rates.
While extending the repayment term usually results in overall larger debt due to an increase in the amount of interest owed, it also spreads the debt out over a larger number of payments. Depending on the amount of outstanding debt, consolidated student loans can increase repayment terms from the standard 10 years up to 30 years.
Reduced monthly payments are an important benefit of consolidated loans, especially for recent graduates just entering the workforce. Lower payments make more money available to cover other living expenses including housing, car payments and career-related necessities. When it becomes more affordable, borrowers can make larger payments without penalty to shorten the repayment term.
Consolidated Loans Can Result in Lower Interest Rates
Many federal student loans are based on variable interest rates, which can result in higher payments later in the repayment period. The interest rates for federal consolidated student loans are usually fixed, securing the rate for the life of the loan. Fixed rates on consolidated loans are based on the weighted average interest rate of all the combined loans.
Improve Credit Scores with Consolidated Student Loans
When consolidating multiple loans, the new lender pays off all the existing student debt. This process reduces the number of outstanding loans, which in effect helps increase the borrower’s credit score.
Prior to obtaining a consolidated loan, the borrower will have an open account on their credit report for each outstanding loan. For example, if as a student, the borrower accepts two loans each year for four years, she will have a total of eight open balances on her credit report. Once consolidated, the credit report will show eight loans paid in full and only one new consolidation loan. The reduced amount of potential debt improves the borrower’s overall credit rating.
