When it comes to ways to get out of debt, there are two options available if you’re wanting to consolidate student loans.
These two options are federal student loan and private student loan consolidation.
However, these two are entirely different.
Read on and find out what the difference is and how consolidation can help you towards your goal of financial freedom.
Debt-Free Financial Life: Consolidate Student Loans
Federal Student Loan Consolidation
This is a program offered through the Department of Education.
While you are eligible for student loan consolidation under most federal loan repayment programs, if you are aiming for a lower interest rate, this might not be a suitable option.
Private Student Loan Consolidation
Unlike federal loans, private lenders are responsible for private student loan consolidation.
Also known as student loan refinancing, one thing to consider throughout this process is that the companies will perform a credit score check.
(Did You Know? A Consolidation can lower payments, reduce a loan term, provide forgiveness benefits, and average out high-interest loans. Find out if you should consolidate your federal student loans with the complete 17-page guide of the most important factors to consider. Click here to learn more and get the free guide.)
Your credit score then determines your eligibility.
If you pass, you can save money through a lower interest rate.
Why Should I Consolidate Student Loans
Millions of young people are deep in student loan debt. In total, 44 million Americans owe over $1.3 trillion. We must address this crisis. pic.twitter.com/aJ2jgRFdVZ
— Robert Reich (@RBReich) August 28, 2017
When you consolidate student loans, it makes payment on your educational debt easier.
This is because by consolidating your student loans, you’re ensuring you only need to make one solid payment monthly.
This cuts down on confusion, as you no longer have to handle multiple payments and due dates every month.
Let’s take an even closer look at the advantages of consolidating student loans, as well as possible disadvantages.
Pros
1. Hassle is Minimized
In other words, your payments are simplified.
Consider a regular borrower who has 7 loans in 3 lending companies after graduation.
Keeping up with these payments one by one every month can get confusing.
2. Interest for a Lower Rate
By refinancing multiple student loans through private student loan consolidation, you can achieve a lower interest rate for your new loan.
This means there’s now a higher chance for your credit score to improve.
Moreover, this will result in lower monthly payments, meaning you can save more money each month.
3. Opportunity to Recover from Default
Recovering from default from your federal student loan will make you eligible once more for loan forgiveness programs, deferment, and forbearance.
However, you will need to choose a repayment plan that is income-driven.
The other option is making full payments monthly for 3 consecutive months on time before consolidating.
Cons
1. More Interest for Federal Student Loan
How can this happen?
When you consolidate your federal loans, the repayment term will also be extended.
This results in a higher interest paid throughout the entire span of your loan life.
Aside from that, any interest which is not paid gets added up to the principal loan.
When totaled, this equates to a higher interest, as you’ll have to pay the interest on top of your existing interest.
2. Perks Are Reduced or Removed
Deciding to consolidate your federal student loans will remove any prior payments you’ve made, such as the 120 loan payments paid in full for the PSLF.
This means you would have to start again in paying those 120 loan payments in full after consolidating to qualify for forgiveness.
Also, consider consolidating the federal student loans from the PLUS loans.
Consolidating them together will result in ineligibility for repayments which are income-based, as well as the REPAYE (Revised Pay As You Earn) and PAYE (Pay As You Earn) repayment plans.
Choosing to consolidate student loans makes it easier for you to manage your educational debt.
Though this is only one option to get out of debt, it may be a suitable solution in your situation and help you fix your finances.
Remember, there are so many options available, so choose the best one for you and achieve financial freedom!
(Did You Know? A Consolidation can lower payments, reduce a loan term, provide forgiveness benefits, and average out high-interest loans. Find out if you should consolidate your federal student loans with the complete 17-page guide of the most important factors to consider. Click here to learn more and get the free guide.)
What are your other suggestions you would give to those who want to consolidate student loans and get out of debt? Please share your thoughts in the comments below!
Leave a Reply