9 Key Factors to Consider before Consolidating Your Student Loans
College students take credit every year when in school and this may result in having lots of individual loans. These loans may have varying interest rates and payment terms. Consolidating your loans into a single loan can make your repayment simple, especially if you are handling repayments from different lenders. However, debt consolidation is not a smart move for everyone. Here are a few factors to consider before consolidating your credit.
Federal or private student loan
Student loan repayment terms will vary depending on the type of loans that you have. You should determine whether you have private student loans, federal student loans or both. Knowing the type of loans you have will help you understand what repayment plans are available.
Federal loans have Several repayment plans that one can choose from. If you do not choose a repayment plan, your financier will enroll you in a standard repayment plan,which gives you 10 years to repay the loan. You will also be able to change your repayment plans whenever you want to during the repayment period.
For private student loans, the repayment options will vary depending on your financier. Most financial institutions will offer various payment plans for their clients. However, you do not have the choice of changing your repayment options unless you opt for assistance like forbearance or deferment.
Every individual has financial goals. It is crucial that you choose a debt consolidation plan that supports your financial goals. If you want to quickly get out of debt, then you should choose a repayment plan that has a short repayment period. You can also opt for a plan that will reduce your monthly repayments if you have trouble making payments or you have financial priorities like saving for retirement or buying a home. A lower monthly payment will reduce your monthly burden, but it will increase the cost of the loan.
Before choosing a debt consolidation plan, you should determine the amount of money that you can comfortably pay every month. You can achieve this by determining the amount you spend on basic expenses such as rent, food, gas, and other key necessities. Use your paystub to calculate the amount of cash that you earn after taxes. Depending on your income and financial situation, you can choose to put more cash towards your student loans or opt for a consolidation plan that offers lower monthly payments.
Consolidating your student loans is a good way of improving your credit score. This is because you will have paid off several loans in their entirety and will only remain with one. Your credit score will also improve because your new loan will have a lower interest rate than the other credits combined. Furthermore, you will not have many creditors, which will boost your credit further. Debt consolidation is a good option for individuals who are servicing several student loans and therefore find repayment quite a challenge for them. Check out nationaldebtrelief.comfor additional details.
Consider your interest
All student loans have interest. However, these rates will vary dependent on the type of loan that you have. Federal student loans usually have fixed interest rates, while private loans may have either fixed or variable interest rates. Fixed rates will be the same throughout the life of your loan. On the other hand, variable rates may change in the course of the loan period and this will affect the interest you pay and monthly payments. Before you consider debt consolidation plans, you should check your interest rates to determine which payment plan will suit your financial circumstances.
Merits and demerits of every plan
Not all repayment plans are equal and each has its pros and cons. Make sure that you weigh the monthly payment amounts, interest rates, repayment terms, and eligibility requirements of different lenders. This will help you to easily determine the best consolidation plan for your current situation. Every individual has a unique financial situations and unique priorities. Therefore, you should consider how every repayment option will personally affect you and your overall life.
Eligibility for forgiveness
You should know that consolidating your loans may affect eligibility for loan forgiveness. This is especially true if you have made progress for loan forgiveness under the 20-year income-driven programs or 10-year period for civil servants. Make sure that your loan consolidation does not affect loan forgiveness because that would mean that the consolidating is not worth it in the end.
Think about both the short and long-term
For recent graduates, loan consolidation may not be the best choice because your financial situation is bound to improve with time. Income-based repayment options are a better alternative if you expect your financial situations to improve over time. However, consolidation can be great for graduates whose salaries do not increase significantly over time. Before consolidating your loans, you should take time to weigh both the short-term and long-term benefits and demerits that the plans may offer.
Consult your lenders
If you are not able to make your monthly repayments, it is crucial that you contact your lender or loan servicer. For federal loans, you can apply for an income-driven plan that will restrict your monthly repayments to a certain percentage of monthly income, usually 10 to 20%. For private loans, you should inquire from your lender regarding the options they have. You can also postpone your payments temporarily by considering deferment or forbearance. However, you should remember that postponing your payment may end up extending your repayment periodand due to accrued interests, your loan will increase.
Consolidating your loans can be an intelligent and responsible decision regarding your education finances. Paying your monthly bills when you have several student loans can be quite challenging. It is not good for you to spend most of your income paying off student debt. However, you should remember that simplifying your loan repayment through consolidation is not a guarantee of saving. You will end up with a single loan that will be easier to pay and you will be able to make financial progress over time and boost your credit score.