For young graduates, student loans represent one of the biggest financial drains. College tuition is constantly on the rise and each year the average amount of debt amassed by an individual in tertiary education escalates. According to recent figures, graduates have an average debt of $27,000, almost equal to the average yearly salary.
Put into the context of the ongoing recession and limited job prospects for graduates, dealing with the mountain of debt effectively is a priority. Student loan debt consolidation presents itself as a good option for many – let’s look at its pros what it entails:
Some Advantages of Student Debt Consolidation
There are a number of benefits of student loan consolidation:
- It means simplifying numerous debts into one payment instead of many
- It attracts federal income tax deductions
- It helps make budgeting easier for those who struggle with balancing their finances each month
Who is able to apply for student loan consolidation?
In order to be eligible for the benefits of student loan consolidation, an individual needs to:
- Have an up-to-date payment history with no defaults
- Not be in full time education – they can be a graduate or studying on a part-time only basis.
This means that debt consolidation is an option for those who have kept up with repayments and have finished studying or study part-time.
Different options for federal and private loans
If you have both federal student loans and private loans, be aware that you cannot combine these into the same consolidation package. You will need to examine the options for both paths separately. Federal student loan consolidation is usually guaranteed so there is more leeway to negotiate more favorable repayments.
In addition, if you have other debts (such as those from credit cards, mortgages, personal loans), these also do not fall under the umbrella of student loan consolidation and require other action.
Ways to repay the consolidated loan
One of the best things about student loan consolidation is the variety of repayment options that exist, allowing the individual to benefit from more flexibility in controlling their finance and repayments in an affordable manner. The options include:
- Standard repayments: These are fixed amount payments, spread out over a set term. For example, you may opt to pay $200 a month over a period of 10 years.
- Graduated payments: These are payments that become larger over the term of the loan.
- Income-based payments: These are variable payment options that become bigger or smaller dependent on the individual’s annual income and earnings.
- Extended payments: These are most suitable for individuals with very high levels of student loan debt. The payment is reduced by extending the loan term to help the individual repay the loan over a longer time period.
Important aspects to take into consideration
In deciding whether or not student loan consolidation is right for you, consider the following aspects:
- Interest rate: The rate of interest of the consolidation loan is the most important factor to consider as it can potentially increase the debt balance by thousands of dollars over many years. Compare loan offers carefully before accepting one and be sure that you can afford the repayments.
- Terms and conditions of the loan: As you may be making a very long financial commitment, it is imperative to understand the terms of the loan, such as the interest rate cap (the maximum interest that will apply) as well as the minimum interest that will apply.
- Prepayment fee: Some lenders apply a prepayment fee to student loan consolidation. This is a penalty for paying off the loan early. It is better to find a lender that doesn’t apply such a penalty, as you do not want to be penalized for successfully repaying your consolidated loan early.
Take positive steps towards living debt-free
Student loan consolidation can be an empowering and positive step towards financial freedom and improving bad credit. Always carefully consider your options without pressure to accept any loan offer. Our comparison service is an ideal first port of all, with fast matching, a simple application form and a secure process.