Consolidation loans are meant to compile all of a person’s loans in one place. This can be a convenient way to pay off student loans by reducing it to one monthly bill. However, it is important to realize that people who choose to do this may pay more interest this way.
Consolidation loans were made popular in part by the Sallie Mae Loan Association. If you wonder why to consolidate student loans, consider that fact that the interest rate is usually put on a “fixed” interest schedule, rather than a variable one, even if the original loan was on a variable rate.
If someone started with a variable interest loan that was increasing, this could be a great solution. Consolidation is refinancing, and a student or borrower is only eligible to apply for this type of loan if they have more than one federal loan.
If a student is trying to decide whether to consolidate student loans, it’s important to remember that consolidation of student loans is only possible with federal loans. Check with the lender before borrowing to find out if the loan your child may take out is eligible for federal loan consolidation. When consolidation takes place, the student may be eligible for consolidation with the Sallie Mae Foundation, other federally subsidized lending institutions, or the Department of Education.
If the loan is handed over to the Department of Education, it is, in essence ending up where it started. The Department of Education hands out millions of dollars in federal loan aid each year for students who wish to go to college but who cannot afford to go without financial help.
Private loans are not eligible for this type of consolidation loans. However, students who borrowed with a private student loan might qualify for that company’s consolidation or refinancing plan. This will depend on the company and how they handle student loans.
Why consolidate student loans?
Many people are “on the fence” about whether they should consolidate their student loans. The advantages to this are that it will result in only one low monthly payment and is a culmination of all of the student loans a borrower took out. Only federal loans are eligible and some may not be eligible to be included in the consolidation.
The disadvantage to consolidation one’s federal student loans is that it may result in higher interest payments than it did when the loans were considered and being paid back individually. This decision is totally up to the borrower, but find a federal student loan consolidation something that one should only do if they want to extend their loan payment out over a more extended time.
Also remember that, when you consolidate payments, it will include all new terms that may or not reflect the terms of the original agreement. More often than not, consolidation is done by allowing another company to purchase the loans and pay them off. This means the borrower no longer owes the original lender. But there will be all new conditions placed on the loan payback schedule based on the policies and factors of the consolidating company.
Borrowers should only consolidate federal student loan payments when they have already determined that it will be a financial hardship to pay off the loans the traditional way or if there is a need to extend the payments over more years than they can manage with the original loan.