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Student Loans, Should You Consolidate?
by Robert G. Yetman,
Jr.
A college degree remains one of society’s most
sought-after credentials. General statistics suggest that a person armed
with a bachelor’s degree (four-year degree) can earn roughly $1 million more
(over the course of his working life) than a person who possesses a high
school diploma alone. Unfortunately, the financial cost associated with
obtaining that prized possession has skyrocketed over the past couple of
decades. In order to finance higher education, many people turn to student
loans which allow the borrower to pursue his education on borrowed funds
while deferring the commencement of the repayment obligation until
graduation. Once they leave school, however, many young people often
encounter difficulty with the financial management of their new student loan
obligations upon graduation, both in particular and also within the context
of the numerous other financial obligations that self-sufficient adults must
face. To help with the student loan part of the problem, enter the Federal
Student Loan Consolidation program.
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The key beneficial feature of the program is that
it permits the borrower to combine all outstanding federal student loans
into one loan and extend the repayment term; the resulting benefit is a
single student loan repayment obligation with a lower (in some cases,
much lower) monthly financial obligation than that previously
endured. The key disadvantage is that by extending out the
repayment period, borrowers stand to end up repaying a lot more
total money over time.
Historically, many financial professionals have
been less-than-enthusiastic about consolidation loans, in general.
First and foremost, there is the aforementioned potential for paying out
a lot more money overall with the extended repayment periods;
additionally, there is the too-often observed propensity of many people
to take on additional debt as they get comfortable with the greater room
realized in their monthly budgets from the consolidation of previous
debt. Still, people who are aggressively pursuing consolidation options
are doing so because they’ve recognized an acute shortage in disposable
income each month, and need to make a change right away, and as loan
consolidation goes, the Federal Student Loan Consolidation program
offers some of the most beneficial terms.
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For one thing, Federal Student Consolidation Loans
don’t have prepayment penalties, which means you can pay your balance down
as fast as you want. Furthermore, the law prohibits lenders from assessing
application fees and origination fees. Plus, there is no credit check. As
for rate and term, the program is very competitive: The interest rate is
generally determined based on the weighted average of all of the loans being
consolidated, rounded up to the nearest eighth of a percent, but in no case
in excess of 8.25%. There is also a variety of repayment terms available,
which enhances the attractiveness of the program.
Before you get too excited about all of this, remember
that we’re talking about the consolidation of federal student loans,
not private student loans. Private student loans are not eligible to be
rolled into this program. There are, of course, consolidation loans offered
everywhere on behalf of private student loans, but banks and other lending
institutions making private student consolidation loans are not bound by the
federal consolidation loan terms that are so beneficial to borrowers. This
means that private consolidation loans can assess application fees,
origination fees, have less agreeable repayment terms, etc.; in short, they
are loans made strictly through the private market (like most loans), so
they can be less agreeable. As for private loan consolidation, that is
something that you would simply have to research with lenders to get the
best deal for yourself, as if you were shopping for a car loan. None of the
beneficial features of a Federal loan would necessarily apply (such as no
application fees, low interest, etc.).
As for eligibility, basically any student loan that
originates through the federal government is eligible for Federal Student
Loan Consolidation, including Stafford, PLUS, Graduate PLUS, Perkins, and
SLS loans (Supplemental Loans for Students); this is, by no means, a
complete list, but if you have a federal student loan of some kind, it is
likely eligible. If your loan originated through the Federal Family
Education Loan Program (FFELP) or the Federal Direct Loan Program (FDLP),
you’re “good to go,” although a variety of other federal student loans are
eligible, as well.
In short, if you are one of the folks who took on a lot
of federal student loan debt in order to finance your education and now find
yourself needing some additional room in your monthly budget, the Federal
Student Loan Consolidation program may be just what the financial doctor
ordered. Most banks and other lending institutions participate in making
Federal Student Consolidation loans, so you shouldn’t have to look too far
in finding the program. If your particular institution does not make
this available, a good place to turn is Sallie Mae (Student Loan Marketing
Association), a former government-sponsored enterprise that is now private;
the company remains the country’s largest originator of federally insured
student loans and you can go to them to help with your federal student loan
consolidation needs. You may reach Sallie Mae on the web at
www.salliemae.com, or by phone at 888-272-5543.
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