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When Should You Consolidate Student Loans?
If you have just graduated from college, the likelihood is thatyou are under a large amount of debt in the form of studentloans. You might be wondering if there is any way to reduce theamount you have to pay. One solution for reducing your debt isto consolidate your student loans. Student loan consolidation is similar to refinancing a house onbetter terms: although the principal of the loan will not beaffected, the interest rates you can lock in when youconsolidate student loans to a fixed rate can be substantiallybetter, reducing your monthly payments by up to forty percent.Plus, you might be able to stretch out your payment time toreduce your monthly payment amount even further. The disadvantage when you consolidate student loans during yourinitial six-month grace period is that you must start makingyour payments right away. This can be difficult if you have notfound a job after graduation, although you can wait until justbefore the grace period ends to consolidate, and still receivethe lower rates. Furthermore, once you have consolidated yourstudent loans, you cannot un-consolidate them again, so makesure to consider your choice carefully. How is Interest Calculated When I Consolidate Student Loans?When you consolidate student loans, your lending company paysoff your government loan and issues you a new loan under its ownname. The typical way to determine the interest rate on the newloan is to take the average interest rates on all of the studentloans, and offer a new rate that is an eighth of a percentagepoint higher (up to a maximum interest rate of 8.25%). Although agreeing to a higher interest rate might not sound likea good reason to consolidate student loans, this rate is fixedover the life of the loan, whereas the government rates willfluctuate. Since rates are at an all time low right now, lockingin the current rates might be a good idea. Furthermore, manybanks give you ways to bring down the percentage rates. Forexample, some lending institutions will drop the rate by as muchas a quarter point if you agree to automatic deductions from achecking or savings account, whereas others drop the rates aftera certain number of timely payments. As an additional bonus,there is no penalty for paying off your consolidated loan early. When Would You *Not* Want to Consolidate Student Loans? Beforeyou decide to consolidate student loans, you should carefullyconsider your alternatives. For example, did you realize that itmight be possible to have your student loan cancelledaltogether? Student loan forgiveness options includevolunteering, for the Peace Corps for example, or working forthe government in a low-income area as a teacher or doctor.Cancellation is not possible, however, after you haveconsolidated your student loans. If this kind of work interestsyou and is available, it could be a better option than loanconsolidation. Another time to hesitate before you choose to consolidatestudent loans is when you are close to finishing your payments.Stepping up the payments and saving yourself some interest andthe hassle of consolidation might be more advantageous to you. Finally, there are loans that you might want to keep openbecause they offer special advantages. For example, if you areconsidering going back to school and you have a Perkins loan,you would not want to consolidate that with your other studentloans. The government will pay all interest on Perkins loans while youare in school, but if you have chosen to consolidate studentloans, you will not be able to receive this benefit. You couldalways choose to leave any special kinds of loans out of theconsolidation mix, however. |
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