Got student loans to pay off? So do I, and I wanted
answers to my questions about college loan consolidation. Once I found those answers I figured, hey, maybe other people
might appreciate this. So I typed up what I know and put it here in a nice question and answer format. Enjoy.
(And remember, loans suck.)
Q. Hey, uh, what is loan consolidation?
A. Well, let's say that you applied for and received a Federal Student Loan each of the four years that you were in college. You now have four loans. Consolidation, as the name implies, combines those loans into one giant package.
Q. So, yeah, why would I want to do that?
A. Good question, glad you asked. There are several reasons why you might want to enter the wacky world of college loan consolidation. Here's some:
Reason #1: It's free (and easy). Because lenders make their money just by owning your loan, the good ones don't charge any fees to apply or participate in the program.
Reason #2: Loan consolidation locks in your interest rate. Your original student loans are variable rate, which means that their interest rate can go up or down. Consolidated loans are fixed rate, which means that your interest rate will end right where it started. Since interest rates are very low at the moment (as all the loan consolidation companies will tell you), right now would be a good time to consolidate.
Reason #3: Loan consolidation companies are desperate money grubbers. In other words, they'll give you incentives to get you to consolidate with them. For example, most college loan consolidation companies will give you interest discounts for signing up for some auto-pay system (expect about a .25% interest rate deduction for that). Two or three years of on time payments will lower your rate even further (expect a full 1% interest rate deduction for that).
Other Reasons: College loan consolidation allows you to make one monthly payment (instead of several payments to different lenders). Of course, if you only have one lender to begin with, this won't matter to you.
Consolidation will lower your monthly payment (by around 50%). It accomplishes this task by extending the term of repayment from ten years (the standard term for federal student loans) to thirty years. This is good if you are really strapped for cash because you just graduated and have a suck-job. However, this is bad because you will pay more interest in the long run.
How to work the "College Loan Consolidation System":
First: Consolidate your loans and lock in that low interest rate.
Second: Sign up for the auto-pay system to make sure you pay on time and to get the discount.
Third: Set your payment to be double the minimum monthly payment (what it would have been without consolidation).
I believe that this technique will save you quite a bit of money in the long run. You will reap the benefits of loan consolidation while avoiding its drawbacks. Though slightly more costly now, it should be affordable for most (just cut back on the lattes or beer or whatever).
Q. By the way, what's with your title?
A. What can I say? Loans suck. You have to pay them back. With interest. Gifts or grants are far better.
So, what are you waiting for? Lower your student loan payments.