Loan consolidation is a convenient way for students to repay multiple loans. This is usually done to lower the number of payments down to one. Another major reason could be to lower the overall interest accrued on multiple loans. There are two types of loans that students tend to take. These are federal loans and private loans. While there are fundamental differences between each loan type, the commonality between both private student loan consolidation and federal student loan consolidation are the same.
Federal Student Loan
Consolidation of Federal student loans is a wide-spread practice of combining the debt for loans borrowed from the state. Students usually opt for federal/public loans for a number of reasons. Federal loans are financed and supported by the government. This means that the government provides a fixed interest rate for borrowers. If there is an unexpected weakening in the economy, the payments will not go up. The interest rate usually changes between 3.5 and 6.7 percent for state-backed loans. A crucial fact to mention is this interest rate can go up to 8% if the loan is taken by the parent to assist the child. Lastly, students who apply for government-backed loans can be considered for student loan forgiveness. The decisive factor here is the occupation of the borrower. So not all people from diverse jobs would benefit from this.
Federal Student Loan Consolidation
It is crucial to understand Federal Loans Consolidation before opting for this type of loan. This option may not be the best in some cases. Borrowers have to carefully evaluate the positives and negatives to know if it works in their specific situation. One of the positive sides of Federal Student Loan Consolidation is that borrowers have a sole servicer. This means you will not have to deal with several different service providers. Another benefit is that the interest rates are fixed, which means you can make payments in equal installments. This is especially advantageous when you have variable interest rates before consolidation.
Additionally, you may have to pay smaller amounts every month by prolonging the duration of payback. You can prolong this payment duration for as long as 25 years, without worrying about the upper limit when it comes to the eligibility for consolidation. The point worth mentioning about the Federal student loans Consolidation is diverse payback options. This means that you can pay back your loan through different earning-based options such as PAYE, PSLF, and more.
Negatives of Federal Student Loan Consolidation
Despite the benefits of Federal Student Loan Consolidation mentioned above, it may not be the optimal choice in every case. For instance, while consolidating Federal student loans, your payback period will be longer. This means that in the long run, it will not make you financially better off. As a result, you will have to pay interest for a longer-term. This, in turn, will result in a lot of payments to be made over the term of the loan. Apart from this, you are allowed to consolidate your Federal Student Loan only once. The interest rates may go down after you are done consolidating. If this happens, that is bad luck, as you won’t be capable of changing. You should not forget that private lenders offer a discount on interest rates in specific cases. If you meet those criteria and go for the Consolidation of Federal Student Loan, these benefits will go away. Lastly, you are unable to consolidate your private loans to your federal loan consolidation.
In brief, you need to take into consideration the upsides and downsides of the Consolidation of Federal Student Loan. Direct Loan Consolidation might be less risky, yet it may become more costly in the long run. So think twice before submitting the documents.
Private Student Loan
The federal student loan is not the only way to finance your education. The private student loan is available as well, for the same purpose. Usually, banks, private agencies, online lenders, and other entities offer this type of loan. Around 10 percent of students who take a loan for studies, apply for private student loans. This might look like a small number, yet it makes more than $180 billion, which is a big enough amount. Just like Federal Student Loan, this option also has some pros and cons.
Private Student Loan Consolidation
There are numerous reasons why the Consolidation of Private student loans may be more beneficial for students. One of the critical points is you can apply for it when you are unable to take a federal loan. This might occur when you are on the limit for a federal loan. Another advantage of Private Student Loan Consolidation (PSLC) is you may get a lower interest rate for your loan. This will be based on your or co-signer’s credit score. In this case, you would pay less for your loan in the long term. Besides, if you have not performed well enough during your university years, this choice may benefit you. Not all students can get a Federal Loan because of their academic performance. This does not affect them while choosing to consolidate private student loans. It is also necessary to emphasize that students can consolidate their federal loans to PSLC. This is impossible in the case of government-backed loans.
Disadvantages of Private Student Loan Consolidation
Although several benefits of Private Student Loan Consolidation exist, we should not forget about the downsides. In most cases, the interest rates in this option are higher than Federal Loan Consolidation. There is also a big probability that interest rates will be variable rather than fixed. It means you may have to pay different amounts each month. This amount may be unaffordable for you at some moments.
Further, in case you are unable to fulfill the remittance, your lender may sue you. You certainly do not want to find yourself in court. The payback alternatives for Private Student Loan Consolidation is very limited, too. Your lender will not provide the flexibility for you that you may get from the government. An example can be Income-Driven Repayment.
Another important fact regarding Private Student Loan Consolidation is the chance of student loan forgiveness is unavailable here. So if in Federal Loan Consolidation you could receive your student loan forgiveness, here it will be impossible. Finally, the prepayment penalty issue is another possible negative aspect of Consolidation by Private Student Loan. You do not have to pay any fee in advance in Federal Loan as there is no prepayment penalty fee. However, while choosing Private Student Loan Consolidation, you need to double-check this issue with your lender.
As you can see, there are vast and noticeable differences between Federal Student Loan consolidation and Private Student Loan Consolidation. Even though government-backed loans are more common, we must not forget about the benefits of the Consolidation of Private Student loan. In short, compare these two sources of funding for yourself and choose wisely. You will have to pay back for many years.