Managing multiple student loans after graduating is an art that is not known by too many people. While consolidation can be a really smart move, students often labor under misconceptions that can lead them to make the wrong decisions. Some common myths clarified:
Consolidation and Refinancing Are the Same
Debt consolidation and refinancing are quite distinct and different from each other. Consolidation of debt involves combining several federal student loans by the Department of Education. The applicable rate of interest is the weighted average of the individual loans plus one percent. On the other hand, refinancing is available only from private lenders and you can refinance both federal and private student loans. When you refinance, you can include as many loans as you like, switch to a different rate of interest as well as change over from a variable rate to a fixed rate or vice versa and change the repayment tenor.
The Process of Consolidation Is the Same for All Student Loans
The approach for consolidation of private student loans differs from that of Federal student loans. If you have private loans or a mix of private and Federal loans, you can work with a private lender to refinance the loans. The rate of interest and other terms will depend on your credit history, and personal financial information, including income. Requirements and evaluation criteria differ from company to company. If you only have Federal loans, you can apply on the website of Federal Student Aid for Direct Consolidation Loans. You are not likely to save on the interest cost; however, loan management becomes simpler because you only have one debt to service. Consolidation is also a prerequisite for participating in certain Federal repayment plans.
Consolidation Is the Only Method of Getting a Fixed Interest Rate
Earlier, the sole method of getting a fixed interest rate on Federal student loans was to consolidate; however, amendments made in 2006 ensured that your rate of interest remained fixed irrespective of market movements even if you didn’t consolidate. Private loans may carry variable or fixed rates of interest depending on your choice at the time of taking them out. If interest rates are rocketing, it is better for you to refinance them to a fixed interest rate for better management of expense.
To Consolidate Your Student Loans, You Need to Pay a Fee
There are quite a few companies that will charge fees for assisting you to consolidate your loans. However, Federal Direct Consolidation Loans application can be very easily undertaken by you online without any help or any fee. Consolidation of private loans is best done by shopping around for the best terms and conditions. Normally, the most reputed lenders do not charge any fees.
Conclusion
Consolidation of student loans should only be done by looking into all the aspects. It can be very easy to get into an arrangement that extends the tenor and results in paying a greater amount of interest. Before taking a decision, make sure that you will be able to repay the debt.
