You've heard about loan consolidation and the thought of making a smaller payment to one lender sounds wonderful compared to your current nightmare of feeding a seemingly endless stream of money to a variety of lenders. No contest--where do you sign up?
Rein yourself set for a moment. Consolidation may be the perfect solution to your financial woes and then again it might not be. So before you jump on the consolidation bandwagon, here are some things you might want to consider.
Are Loan companies Axing Consolidation Loans?
In an effort to remedy some inequities within the federal student aid programs, Congress recently enacted the school Cost Reduction and Access Act of 2007, that among other provisions, cuts lender subsidies that have historically experienced place to encourage lenders to participate in the actual federal education loan programs. This legislation, in concert using the recent subprime mortgage credit crisis, has lenders taking a closer look at whether education loans continue being profitable for them.
Higher education leaders anticipate that lenders may reduce the Stafford and PLUS loan incentives and discounts previously agreed to attract borrowers--and eliminate them altogether for consolidation financial loans. Consolidation loans, with the tightest profit margin of education loans, may even be on the chopping block for many lenders while others may increase the minimum balance that qualifies a borrower for any consolidation loan.
Even if lenders back out from the consolidation loan business, consolidation is still available with the federal Direct Consolidation Loan program, but the government doesn't provide the incentives and discounts that lenders have long already been using to attract borrowers.
Are Interest Rates Decreasing?
Stafford Loan and PLUS variable interest rates, which provide a formula that includes the interest rate of the very recent 91-day T bill, change every July 1; rates are required to drop significantly on July 1, 2008. This decrease should make the educational loan variable rates of interest very attractive. Because the interest rate for a consolidation loan is calculated utilizing a weighted average of all interest rates for all the loans you would include in consolidation, you might want to wait until after July 1 to make a far more informed decision.
Consolidation: Thumbs Up or Down?
To consolidate or to not consolidate: that is the question. But there's absolutely no easy answer.
Consolidation may be a good concept if:
o You have a variable interest rate and prefer to have a fixed rate. This may be a good idea but you might like to wait and consider it only if interest rates start returning up. And, what happens if variable interest prices stay down or drop below your fixed price?
o You have a variety of loans and lenders and want to have only one lender. One problem--you may need to 'pay' for the convenience by accepting a higher rate of interest on some of your loans.
o You need much more flexible repayment options. Repayment options available through loan consolidation are:
Standard - fixed monthly payments.
Graduated - begin with low payments and increase every 2 many years.
Extended - for amounts greater than $30, 000, whether fixed or graduated option.
Income contingent - depending on annual income and total loan debt, with a payment adjustment each year as income changes. The FFEL program offers earnings sensitive repayment, which bases monthly payments on a portion of income.
Although the Stafford Loan programs provide flexible repayment options, the Perkins Loan program currently doesn't. Note: An income-based repayment option will become readily available for FFEL and Direct Stafford, Perkins, Grad PLUS, as well as Federal Consolidation (less undergrad PLUS) mortgage borrowers on July 1, 2009.
o You absolutely have to ease up on your monthly payments. Beware of the option. A lower payment generally means a longer repayment period and paying more interest with time.
Consolidation may not be a good idea in the event that:
o Any of the loans you plan to include have cancellation or forgiveness options which may be lost if you consolidate.
The Perkins Loan Plan, for example, has a cancellation option if you teach using public school service professions or subject areas or using designated low income schools.
Portions of a Stafford Loan may qualify for cancellation if you teach full time for five consecutive years inside a low income school. (Under certain circumstances, this option can also be available for consolidation loans. )#)
o Your current lender offers rebates (for example an annual reduction in your interest rate) with regard to successive on-time payments. You would lose this option should you consolidate and, as previously mentioned, lenders may end up being phasing out incentives for consolidation loans.
o You consolidate on your grace period(s). The remainder of your own grace period is lost.
o You've already substantially reduced the total amount you owe. Because consolidation generally extends your payment period, often with an increased interest rate, you might ultimately end up paying more.
Research and Overcome
Unfortunately the answer to whether or not consolidation is befitting you is... "it depends. " To find away, collect information about what federal loans you possess (Perkins, FFEL, PLUS, and Direct Loan programs) by accessing the National Education loan Data System (nslds. ed. gov). Collect details about any private educational loans you have directly out of your lender(s). Take the loan information and find an online consolidation loan calculator that will help you determine how your loan repayments may change via consolidation.
Then ask yourself the following questions:
o Am I prepared to pay higher interest or extend my repayment period and pay more interest with time?
o Am I going to lose any loan cancellation options or incentives that I'm currently eligible?
o Can I afford my present payments without consolidating?
o Would consolidation actually make my payments much more affordable?
o Does the 'lower payment now' benefit counteract the 'pay more for longer' downside of loan consolidation?
You can see that the decision whether or not to consolidate is not monochrome. It is an individual decision--it may work for many and not for others. Because there are long-term implications to consolidation, do your research and weigh the benefits and drawbacks carefully. When all of the evidence is within, you should be able to decide whether or not really a consolidation loan is the answer for you.
Federal Direct Loan Consolidation Program that allow student to consolidate Student Loans. With the help of Federal Direct loans Consolidation, an individual is able to combine multiple federal student loans into just one loan. Federal Loan Consolidation involves taking out a new Consolidation Loan to pay off existing federal loans.