Lower loan consolidation rates often lure students into consolidating their separate loans. However, one must assess the pros and cons before going for any of them.
For most of us, student loans are a prime source of funding our college education. We often hope that after completing college, we will land a decently paying job, that can take care of all our loans. However, sometimes, situation has something else to offer. Owing to the current economic meltdown, many graduates are finding it increasingly difficult to land a job in the first place; let alone, a decently paying one. Although there is a grace period of six months on federal student and some private loans, the situation rarely improves even after six months. After that, the monthly EMI begins, which becomes a nightmare for the unemployed students. Some of them turn to student loan consolidation option, which provides some relief from the pile of debt.
What is this Loan All About?
As a student, you and your parents may have borrowed money from various private lenders. A single federal student loan is rarely sufficient to cover all your academic and living expenses. As a result, people often end up borrowing from several financial institutions. The interest rates for these institutions also vary to a great deal. Every month, you are required to pay a separate amount towards each of these loans. A consolidating student loan sums up the debt amounts of all the loans into one. As a result, you are required to pay towards this single one only. This relieves you of all the hassles of interacting with several different money lenders, every month. The interest rates on such a loan is calculated by averaging the interest rates of all the separate loans.
Consolidating loans may seem like an obvious choice for any student, stuck up in the pile of debt. They have a cap of interest rate of 8.25%, meaning you won’t have to pay any more than that. Since one such loan can take care of multiple smaller ones, your credit report gets a boost, as it records a paid status for all, in spite of the same impending debt amount. Best rates for loan consolidation can be obtained on federal student loans such as Stafford, PLUS, and Perkins Loans, and others. Since these may have an interest rate more than 8.25%, you will end up paying much less on a consolidating one, as it cannot have an interest rate beyond 8.25%. However, there are certain limitations on the benefits you can avail from it. Firstly, it provides maximum benefits on federal student loans only; private ones may already have interest rates less than 8.25%, in which case, you will end up paying roughly the same amount after consolidation.
Student Aid on the Web defines the student loan consolidation interest rates as weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%, to a maximum of 8.25%. Following example will provide you with a clear understanding of the same:
Mark, a student, has loan A of amount USD 10,000; B of amount USD 5,000; and C of amount USD 3,000. Mark is paying 6.25% interest on A, with a monthly payment of USD 625; 8.5% on B, with a monthly payment of USD 425; and 8.75% on C, with a monthly payment of USD 262.5. Mark’s total impending debt can be consolidated into a single loan of amount USD 18,000 (USD 10,000 + USD 5,000 + USD 3,000). The interest rate on this can be found out as,
USD 625 + USD 425 + USD 262.5 = USD 1312.5
Divide the above amount with consolidated amount of USD 18,000 to arrive at a figure of 0.0729. Converting it into a percentage, you get an interest rate of about 7.29%. The last step is to round it to one eighth of 1%, which is 7.25%.
This was all about the estimate for rates. Make sure that you evaluate your options wisely, before going for it.