College Loan Consolidation

It is not unusual for a student to have taken out a number of loans during college, and many borrowers who are getting ready to leave school and begin repaying college loans think about consolidating them. A college loan consolidation gives the advantages of having only one loan and one monthly payment to deal with, and the payment on a consolidated loan will in almost all cases be lower than the sum total of the individual loans.

If you are consolidating private college loans, you are basically just replacing one private loan with another. You should not take it for granted that you will be able to consolidate your private college loans. The lender is under no statutory obligation to do so, and they may simply refuse to consolidate your loans or declare that they cannot do so because financial markets are tight, for example. Also it is necessary to be very watchful of the interest charge on any private loans you consolidate. It is possible that the lender will raise the loan interest rate to a much higher level than the loans you had before. It is not possible to consolidate private and federal college loans together. The best advice one could offer about private student loans would be to do everything possible to avoid them.

Federal college loans are always better for the borrower than private loans. When federal loans are consolidated there is a cap on the interest that can be charged, and this is based on the weighted average of the interest rates on the individual federal loans being consolidated. The borrower also has a number of protections with consolidated federal college loans, such as the right to defer the loan under certain conditions and the right to forbearance. In addition the borrower has the right to change the repayment plan to one that is based on actual income. So if you go through some difficult financial periods because of losing a job or becoming ill, for example, you can change your repayment plan to one based on income and come up with a lower monthly payment. Of course this means that it will take longer to pay off the college loan and the total amount of interest to be paid will be higher in the end. But if it means that the borrower can avoid defaulting on the loan, then this tradeoff is worth it. It cannot be overemphasized that defaulting on college loans is the last thing a person wants to do. There are huge penalties and collection fees, not to mention accrued interest. Many people who have defaulted on student loans are shocked to find out that they now owe three or four times the amount of the original loan.

When considering a college loan consolidation, there are two main guidelines that if followed will help a borrower avoid default and the enormous levels of pain that go with it. That is, a person should not borrow more than his or her starting salary is expected to be. Also, the monthly loan payments should not exceed 10% of gross pay. If a borrower goes much beyond this he is very likely to have difficulty meeting all his living expenses and still stay current on college loan payments.

Borrowers should also be aware that once a federal college loan has been done it cannot be refinanced at a later date. So the borrower is stuck with the loan, the interest rate, and the lender for the duration. And remember that student loan debt cannot be dismissed in a bankruptcy proceeding.