Consolidate Student Loans to Lower Payments
With the ink still wet on your college diploma, the first student loan bill comes in the mail. Wow, those four (or five, or six) years of college adventure have a pretty nasty price tag.
Fortunately, the mailbox is stuffed with student loan consolidation offers. Trouble paying your student loans? Debt consolidation is the answer! Lower payments! Lower interest rates!
Is student loan consolidation the answer to your problems?
Student loan consolidation: Working the numbers
Student loan consolidation gives recent college graduates the ability to cut their monthly payments, at the cost of extending the repayment period of the loan. When you take out a student loan debt consolidation loan, your debt is transferred to a new lender. As part of the consolidation terms, you usually have 15, 20 or even 25 years as your repayment period.
Assuming your interest rate remains the same, that's a significantly longer time for interest to accumulate, which dramatically increases the cost of your student loan debt. Consolidation should be carefully examined in order to keep interest costs as low as possible while still giving you some financial relief.
Student loan consolidation: When to consolidate
Student loan debt consolidation isn't necessary for all borrowers. Consolidation is meant as a remedy for specific problems in repayment that are making a hash out of your credit report. Here are a few good reasons to consolidate your student loans.
- Multiple monthly payments. Depending on your specific college financing solution, you may owe money to several different lenders. Once your student loans enter repayment, you might be sending checks out three or four times every month. With multiple payments, it's easy to lose track of what checks go where. If you're making more than two student loan payments a month, debt consolidation may be a good idea.
- High monthly payments. Although the average student loan debt is a little less than $20,000, a significant proportion of college grads enter the work force with $30,000 or more in college loan debt. If your monthly payments are too high, you may want to consolidate. This option will cost you more in the long run, but it will preserve your ability to pay off your loans and build a good credit score.
- Significantly lower interest rates. Most federally-backed student loans are variable interest loans. The interest rate may rise or fall over the lifetime of these loans, changing the cost of the loan. Student loan consolidation locks in a given interest rate over the lifetime of a loan. If the interest rate drops dramatically, you may want to consolidate and save on interest costs for the remainder of the student loan repayment period.
Positive financial habits should begin before you incur substantial debt. An easy way to build a strong credit score begins with a routine monitoring of your credit report to ensure that companies reporting your history do so error-free, and to alert you to potential pitfalls in your credit report.
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