September 3, 2015
Going for a student loan consolidation naturally brings a host of questions that should be answered. Here are some common areas of concern that should be addressed before moving forward with a program.
1. How do I get a lower interest rate?
Having a strong personal credit history and/or a cosigner with strong credit history is a surefire way to earn a reduced interest rate on a private student loan consolidation. An applicant with several active years of positive payment history demonstrates to lenders that they are a reduced credit risk, allowing for a reduced rate on consolidation to be issued.
Many former students may be holding private student loan debt at very high rates because their credit rating (or credit of their available cosigner) was limited when they originally applied. But after graduation, the borrower is hopefully employed and has enhanced their credit rating through consistent on-time payments towards any debt and a longer credit history on file. Basically, the better the credit of the applicant and/or cosigner, the lower the interest rate can be.
2. Can I consolidate federal and private loans together?
This answer depends on your lender. Some lenders do offer refinancing and consolidation options for both federal and private student loans.. Federal student loans like the Stafford loan, Direct Loans, Plus loans and Perkins loans are generally consolidated through the Federal Direct Loans consolidation program, from the Government. This government consolidation will not accept any private loans as part of the application. However, many private lenders will consolidated and refinance both private and federal student debt.
3. Should I get a fixed rate or variable rate?
There is a trade-off for either, and the applicant must decide based on their own preferences. Today, a variable rate loan can provide a very low rate especially for borrowers with strong credit. The variable rate will adjust over time to reflect the underlying rate index the loan is based on like Prime or LIBOR. This works very well for the borrower while rates remain low, but if rates were to increase in the future, more interest could be generated from the application.
With a fixed rate loan, the rate stays the same throughout the loan term, creating a very predictable repayment schedule regardless of general market interest rates. Lenders generally provide a higher interest rate on a fixed loan than what would be offered on a variable rate loan. This program can work very well for a borrower if general market interest rates were to increase above the fixed rate on the loan application, however, if interest rates remain lower than the fixed rate loan it would probably cost more to repay.
Compare options based on which program creates the best debt elimination scenario for you. If a very low rate on a variable interest consolidation is available, look into paying more than the minimum payment due each month to eliminate debt faster. If it’s a fixed rate loan, try to secure as low a rate as possible to make it less costly to repay now. You can learn more about variable vs. fixed rate student loan refinancing here.
4. Can I extend my term?
The loan term is the number of years of payments required to repay a loan. Many, but not all private student loans have 10 year repayment terms. A private loan consolidation may offer a longer term, reducing the minimum monthly payment but ultimately costing more interest to repay in full. Extending a loan term is a simple way to reduce the loan payment each month, and may provide a cash flow management solution that fits the budget. Make sure to compare the number of term years in the consolidation with the individual loan applications to know the difference.
5. How can I accelerate debt elimination?
The fastest way to debt elimination is through making extra loan payments. Just confirm if the consolidation has any pre-payment penalties that would add on costs for making all the extra payments.
Pre-payment penalties could offset the interest savings that extra payments are supposed to achieve. If your consolidation is pre-payment penalty free, the easiest way to manage a month-to-month budget is to have the standard monthly payment automatically withdrawn from a checking account, and send an additional extra payment for an amount that makes sense for the budget. This way the borrower never misses a monthly payment, and can send in extra payments they can afford.
For more debt management tips, download the Debt Management Survival Guide.
Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.
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