For so many recent graduates, the first challenge to face is not how to get their careers off and running, but how to handle the debt that they have accrued. It can be a debilitating start to life in the big bad world, but by consolidating student loan debt it becomes easier to manage what can be described as a major undertaking.
The secret to managing loan repayments has always been to keep the repayment sum as far below the income earned as possible. While this is always preferred, it does not always turn out that way. Consolidation allows for a number of debts to be cleared and replaced by one, more manageable debt.
But, as with all financial moves, there are options to consider, and advantages and disadvantages to weigh up before making any final decision. The right decision can make clearing these student loans much simpler.
Mechanics of Consolidation
The basic idea of consolidating student loan debt is that the combined debt accrued while at college is paid off by one large loan, but this can sometimes cause some consternation with students. After all, taking out a $50,000 – $70,000 loan in one go does seem like taking on too much.
But the benefit lies in the fact that the individual loan terms and interest rates together add to a higher sum than the monthly repayments due on a large loan. Sometimes, managing loan repayments effectively requires taking on replacement debt – and replacement is an important word; it is not extra debt.
Once the existing student loans are cleared, the terms of the large loan are much more manageable. This is because there is only one creditor, one repayment due and one interest rate to consider.
Federal Vs Private Options
Over a college lifetime, the sources of funding can vary. For example, it is not unusual for a student to borrow from the federal government to help pay for college fees, and then borrow from the private sector to help finance living expenses. So, when it comes to consolidating student loan debt, there is more than just one kind of loan to consider.
What should be remembered is that any consolidation should keep the private and the public loans separate. This is so that the specific benefits of the federal loans can be retained. These typically include low fixed-rate interest rates, as well as lengthy periods of grace, which in themselves can make managing loan repayments easier.
So, it is a idea to consolidate the student loans taken out with private lenders, like banks and credit unions, and simply enjoy the positive terms of the federal loans.
Advantage and Disadvantages
Of course, there are some positives and negatives when consolidating student loan debt. On the plus side, the monthly repayments are lower, in some cases by a couple of hundred dollars. This makes extra cash available elsewhere. It is also helped by the fact that the interest rate is generally lower than the combined rates of individual loans.
On the negative side to managing loan repayments in this way is that the term of the large loan is usually extended as much as possible. This keeps the repayments are lower, but ultimately means a higher amount of interest is paid over its lifetime. For example, a $50,000 loan may be repaid over 25 years, not 10, which can mean as much as double the interest.
Still, student loans must be repaid and at the start of a career, when the lowest salary is earned, the most prudent move is to slash the monthly outgoings.