Student Loan Consolidation

Student Loan Consolidation- An Important Decision

Many students who plan to enter college think of obtaining student loans as a foregone conclusion. With the cost of higher education having increased so much in the past 30 years, almost everyone needs to take out student loans, and today about 70% of students graduate with student loan debt. The average debt for students graduating with an undergraduate degree is just over $20,000, and this jumps to $42,000 for students leaving school with

graduate degrees. These amounts are debts from student loans only, they do not include credit card debt. Graduates with multiple loans often consider student loan consolidation.

STUDENT LOAN CONSOLIDATION

Upon finishing college a student often has several separate loans, and consolidating these loans together might to make good sense. You need to know, however, that you can only consolidate your federally backed student loans one time. Thus the interest rate for the consolidated loan is set for the life of the loan. Not only that, but you will not have the right to refinance your consolidated student loan even if you find another lender at a lower rate later on. Also, you need to understand that student loans do not have the same consumer protection that other types of debt do in the U.S. You cannot discharge either federally guaranteed or private student debt in bankruptcy for example.

CONSIDERATIONS FOR STUDENT LOAN CONSOLIDATION

First of all you need to obtain the very lowest interest rate possible on your loan consolidation. You’ll probably be making payments for at least 10 years, more likely for 20 years or longer, so small changes in interest rates can have a large effect on the total amount to be repaid.

In addition you need to be aware of your rights if you become ill, lose your job, or if you don’t find a fob that pays as much as you expected. You need to know that you can get deferments or forbearance for illness and other situations, but these are not for indefinite periods. Interest could continue to accrue, making the principle amount you owe ever larger.

REPAYMENT OF CONSOLIDATED STUDENT LOANS

You have several options when it comes to setting up your repayment plan. It might be wise to set up an Income Based Repayment plan (IBR plan). This is a new option since July 1, 2009, and payments are capped at 15% of a person’s discretionary income. So if you lose your job or find yourself in a job with lower pay than you expected, you can hopefully find ways to keep your consolidated student loan current and avoid default. There are also provisions for loan forgiveness if you go into a public service career for 10 years or forgiveness after 25 years even if you don’t. The amount of the loan that is forgiven is taxable income, however, so there are tax ramifications. If you pay more than the minimum payment be sure to tell the loan company in writing that the excess is to be applied to the loan principle. Otherwise they will probably apply it to the next payment due. Check to verify that the loan company has done so.

A student loan consolidation is very important. You only get one shot at it, and if you find yourself in tight financial circumstances later on you may seriously regret the choices you made. A good book to read is “The Student Loan Scam” by Alan Collinge, which includes many horror stories of people who defaulted on student loans and are overwhelmed by debt and high pressure from collection agencies. You should know about these possibilities before you take out student debt, not afterwards and by surprise.

Just remember- don’t ever default on your student loan consolidation or any individual loan. Even if you make just one payment in a nine month period you cannot be in default. You will be assessed penalties and interest charges, but that is better than default. And realize that student loan companies make much more money on defaulted loans because of huge penalties and high collection fees than they do on loans that are paid off on time.