Graduating from college can leave you with mixed emotions. When the elation has worn off and you begin to pursue the career of your dreams, you may be unpleasantly surprised when you receive your first collection notices from the bank that financed your education. Whether you just graduated or are trying to pay back years of overdue loan expenses, consolidating student loans can help you manage your finances more responsibly.
Student Loan Consolidation
A good time to consolidate your student loans is within the grace period after graduation, usually lasting six months. This will allow you ample time to get your finances in order and decide how much of a monthly payment you can afford. Use our student loan repayment calculator to determine this information when choosing how much time you would like to pay back the loan. A higher interest rate will lead to a higher monthly payment, but it will also shorten the life of the loan. A lower interest rate that lowers your monthly payments will prolong the life of the loan.
Most students have a combination of both Federal and Privately funded loans. Because of the nature of the repayment options, you cannot consolidate both types into one payment. You can, however, consolidate each one separately, leaving you with a maximum of two monthly payments.
Federal Student Loan Consolidation
The United States Government has established a program to help students
consolidate federal loans it has issued. The Federal Family Education Loan Program, more commonly known as FFELP, is a government sponsored organization founded for the sole purpose of loan consolidation. Government loans such as the Stafford Loans, Perkins Loans, and PLUS Loans are all eligible for consolidation.
When you use FFELP to consolidate a student loan, the life of the loan is considerably larger than if you were to pay off each loan individually. This means that you will have anywhere between 10 and 30 years to repay your loan. Another advantage to consolidating is that your interest rate will not only be lower, but also fixed at one percentage. This means that the interest will not change for the entire duration of the loan period, meaning your payments will stay the same as well.
Private Student Loan Consolidation
Private student loan consolidation is similar to other loan consolidation programs in that it allows you to
combine all your private loans into one payment. The main difference between it and Federal student loan consolidation is that the terms of the loan are left to the jurisdiction of the lending institution. They are not regulated by the government in any way, meaning that there is no universal term agreement with which the borrower needs to comply. The borrower has more leeway with these loans, because he or she can research various banks and private loan institutions in order to decide which is most suitable for his or her budget.
What Happens If I Default?
When you miss payments on your student loan, you will receive default status. Defaulting on federal and private student loans will damage your credit rating and cause you to owe far more money than you planned. Private lending institutions are limited in the ways they can be compensated for delinquent funds. Aside from the damage your credit report will receive, banks can take you to court in order to assure their compensation.
Several options are available to the government should you default on your loan. They can “garnish” your paychecks, meaning that they will make automatic deductions from your weekly pay. They can also restrict whatever government securities you currently or will receive, including social security benefits and IRS tax refunds.
If you meet the criteria necessary, you may be able to qualify for debt forgiveness from the Government. Determining factors include military duty and volunteer work or medical work in eligible communities. If you think you may qualify, speak with your employer’s human resources department.