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Student Loan Consolidation: Three Things to Think About

[Dec 22, 2008.]


As times get tougher, it makes sense to look closely at every area of expenditure. For many, student debt is a real burden. So consolidating student loans may be an excellent idea. But it is important to do a little homework first.

1. Understand the existing loan(s)

Before doing anything else, people considering student loan consolidation should first find the documentation for their existing loan(s). They should then check through the agreement's terms and conditions, and determine current balances, interest rates, and monthly repayments. Those who have a problem finding the necessary paperwork about their Title IV loans and grants can consult the US Education Department's National Student Loan Data System (NSLDS).

2. Understand the problem

Presumably, those considering student loan consolidation are facing pressing financial problems. But it is important to understand fully the nature of those problems. They should draw up a realistic list of their monthly outgoings and set those against their income. If the issues they face are short-term difficulties, then they may well be better off talking to their existing lender(s) or loan servicer(s) to see if they are eligible for deferment or forbearance relief that could tide them over until things get better. If those issues are more fundamental, and are clearly going to continue for a long period, then they should explore student debt consolidation options.

3. Understand the implications of student debt consolidation

When times are hard, people often feel so desperate that they are prepared to sacrifice their long-term interests in order to alleviate short-term debt pressures. This is understandable, but better avoided. Reportedly, some student loan borrowers can cut their monthly repayments by as much as 58 percent. However, because a consolidated loan is likely to last much longer than an ordinary student loan, the total amount of interest payable over its life will almost invariably be higher. In fact, the Federal Student Aid web site warns that: "…in some situations, consolidation can double your total interest expense."

There are other considerations to be borne in mind. For example, once loans are consolidated, that is it: the arrangement cannot be ‘unmade’ because the original loans have been paid off and no longer exist. And the timing of consolidation can be important. The interest rate for many student loan consolidations is a fixed one, which is great when rates are rising. But right now they are falling. If it is possible to wait a few weeks or months, it may be possible to consolidate at a record-low fixed rate.

Student loan consolidation can transform an individual's finances and make his or her life immeasurably better. However, it is always risky to enter any long-term loan agreement without first fully understanding the implications.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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