Smart college students and grad students know how to any number of impressive things, like write a sonnet, understand complex physics equations, or speak Old Norse. However, no matter how wise they have become while receiving their higher education, many college graduates remain puzzled as to how to get a handle on their student loan payments.
Why Repayment Is So Challenging
Most individual student loan programs have repayment schedules of up to 10 years. This relatively short repayment schedule squeezes into a relatively short period of time payments for what can amount to tens or hundreds of thousands of dollars in loan debt. The result: very high – and sometimes unmanageable – monthly payments.
Students are particularly challenged in repaying their debt consolidation loan loans given the current state of the world economy. Jobs are more scarce than usual in many sectors – even for these well-educated grads. And, with living expenses showing no relief in sight, managing those regular loan payments is very challenging.
What can compound the problem is when students have multiple loans with different lenders. Holding multiple loans means having different payment due dates each month. It also means paying different interest rates on the various loans, while at the same time having different repayment schedules. This situation makes it hard to plan for one’s financial future.
Defining A Consolidation Loan
A consolidation loan for students is a single loan that one uses to repay all existing, outstanding student loans. The new loan results in the borrower having to make only one payment each month – rather than 2, 3 or more as before. Also, consolidation loans allow for longer repayment periods of up to 30 years. This drives the total monthly payment amount down as compared to before consolidation.
Federal Versus Private Consolidation Loans
The rules and terms for federal consolidation loans and private consolidation loans are a bit different. Under the federal consolidation loan program, the new loan will always have a fixed rate. The loan will be contracted with a government-approved financial institution. The bank rate for a federal consolidation student loan is calculated as the weighted average of the person’s existing loans, rounded up to the nearest 0.125% (with a cap of 8.25%).
Meanwhile, private student loans work a bit differently. These loans will be contracted via any number of private student loan consolidation firms competing in the market today. Unlike with the federal programs, the rate for these loans is calculated based upon the borrower’s credit score. The final rate offered is a function of the person’s credit score and the LIBOR or prime index (depending upon the lender).