Types of student loans and consolidation
Financial aid for college, university, and grad school students takes a number of forms. Among these are scholarships (which do not have to be repaid), student loans (such as the Stafford Loan), parent loans (such as PLUS loans), private student loans, and consolidation loans.
Most students will need some kind of help to pay for their college expenses. Student loans generally offer low interest rates, don’t require a credit check, and offer some option to defer payment until the student either finishes school, quits, or drops below a set enrollment level. The Stafford Loan is one such loan and is either subsidized, in which case the government pays the interest while the student is in school, or unsubsidized, where the student pays the interest. Interest in this case may be added onto the principal and deferred until after graduation (or dropping below half-time enrollment). The Perkins is another federal student loan designed for students with exceptional financial need. The interest rate is lower and paid by the government while the student is enrolled and there are no origination fees.
The Parent Loan for Undergraduate Students (Parent PLUS Loan) is available to parents of undergraduate students as well as to students themselves who are pursuing a graduate or professional degree (Grad PLUS). The interest rate is higher than for student loans, and the repayment period is not deferred unless offered by the specific lender. An important benefit that should be mentioned here is that the cap on consolidated student loans is lower than that of PLUS loans, so pursuing a student loan consolidation is often in the best interest of the borrower in this case.
Private student loans can vary in their terms. Often offered at higher interest than federal student loans, they nonetheless are less expensive than credit card rates. Applying with a cosigner (even if you qualify on your own) can often reduce your interest rate. Deferment options vary widely, and many students and their parents choose private loans in order to allow deferment for their PLUS loans or to provide funding above what is allowed by federal student loans.
Student loan consolidation is available to students after they leave school, but parents may consolidate at any time. It is possible to consolidate loans owned by the same borrower, but you cannot consolidate loans from two different borrowers. For example, if the parents have a PLUS loan and the student has a private loan, the two different parties are responsible to pay their own loans and these cannot be consolidated. Two married students are also no longer eligible to consolidate their loans due to federal ruling. However, it IS possible to consolidate any kind or number of student loans, or even to consolidate a single loan.
The interest rate on consolidated student loans will be found by taking the interest of the loans to be consolidated and their principles and arriving at a weighted average, which is then rounded up to the nearest 1/8 percent. There is no fee to consolidate student loans (if any lender asks you for an advance fee to apply, do NOT pay it as this may be form of an advance fee loan scam).
The advantages and disadvantages of consolidating will vary. You will have to consider not only the interest rate (which can be an important factor if your loan or loans are above 8.25% cap … it might be a good idea to consolidate loans separately if you have some low interest loans and some which are higher and can be lowered through this cap), but you should also consider the repayment terms, which may seem much more favorable after you graduate and are now having to look at repaying your student loans. This can be one of the primary reasons for consolidating. While most standard loans require repayment on a 10-year schedule, consolidations can be extended from 12 up to as much as 30 years. You may also be offered a variety of payment options such as graduated repayment or repayment terms that are based on your future income. (However, be aware that extending the term of repayment will cost more in the long run, since you are using the lender’s money for a longer period of time.) Another point to consider … if your current loan minimum payments will pay off your loan in less than ten years, consolidating that loan will result in a lower monthly payment since you are in effect extending the term.
In short, there are many factors to consider when selecting a student loan or considering consolidating loans. Some of the main benefits to consolidation that bear looking into are the single monthly payment (if you are consolidating a number of loans), access to a variety of repayment plans if your monthly payments are currently too high for you to manage, and automatically giving a reduced interest rate on certain PLUS loans. One of the main cautions we would offer is, if possible, leave your Perkins loan (if you have one) out of the consolidation because it offers certain benefits that would be lost with consolidation.
If you are still in school, apply for all federal loans you may be eligible for before resorting to private loans. And once you graduation, look into loan consolidation to see if the terms can benefit your personal situation.
Entry Filed under: Student Loan