Consider the pros and cons of this solution before you decide to use it. When looking for a student loan repayment strategy, you can hear about their consolidation. Although this method has helped many people successfully pay off student debt, it is important to consider both the pros and cons before we decide. Below you will find everything you need to know about student loan consolidation, including how to start this process.
What is student loan consolidation?
If you have more than one loan or student loan and are looking for a simpler way to organize your repayment, it is possible to combine loans into one consolidated loan. You will get a new loan that adds up the balance of your old loans. The interest rate is set on the basis of the weighted average of original debts. Old obligations are repaid with new money, after which one new amount must be repaid.
Student loan consolidation is not the same as refinancing. When refinancing, you also get a new loan to pay back the old debt, but one that you took out under your mortgage. You can potentially get a lower interest rate with this new loan.
Most student loans can be consolidated, but private loans or direct money from parents cannot be consolidated.
Consolidation may work for some scenarios.
It is beneficial if you want to:
You want to have one fixed interest rate. Loans for consolidation bear interest at a fixed rate, so your repayment will remain the same for the entire loan. This is beneficial if current loans have variable rates that change with the market.
You need smaller monthly payments. Thanks to the direct consolidation loan, the loan period can be extended, thus reducing monthly payments. This probably means you will pay more interest over the entire loan period, but it can help you balance your monthly budget better.
It is easier to have one monthly payment. If you have problems with the organization of payments and think that in this way simplify your finances, then consolidation of loans can help you survive.
Disadvantages of student loan consolidation
Obtaining student loan consolidation is not always the best solution. Perhaps this is wrong for you when:
For faster interest payments some of us take loans with decreasing installments. Many decide to focus on paying back loans with a higher interest rate at the beginning to save money in the long run. Since the interest rate on a loan with direct consolidation is the weighted average of all loans, you will not be able to do so if you consolidate.
You would lose the government benefits of paying off your original student loan. In many cases, consolidation of student loans can mean the loss of discounts and subsidies associated with the government program. If you pay back loans based on a student program, by consolidating them you will lose the preferential conditions that you received at the very beginning. The original loan will be repaid.
You are not going to extend the loan period. Consolidation can lower your monthly payments, but extending your loan term means you will pay more interest over time.
How to get student loan consolidation?
If you decide to consolidate student loans, here’s how this process works.
Step 1: Submit a consolidation loan application to the bank
You can start the process by submitting, for example, one of the following banks that grant student loans. There is no application fee and it should take about 30 minutes to complete. Make sure you have your ID card and the correct credit documents for the original loans on hand.
Watch out for brokers who charge a fee for loan consolidation and Payday loan-type services. This process is free and you can do it yourself.
Step 2: Verify the loans you want to consolidate
When your consolidation bank checks your application, it will contact you with the next steps. During this time, you will confirm which loans you want to consolidate and accept the terms of the new loan.
Step 3: Continue paying back your old loans until the process is complete
Your consolidation bank will let you know when your original loans will be repaid. Until then, you must repay your current debt unless you are in a grace period or repayment is postponed.