Education is very expensive these days and sooner or later you may consider student loan consolidation as an option. Student consolidation loans are among the most popular refinancing loans as they make repayment of the education loans easier to handle. Those loans are in high demand because they offer important benefits. Some of those benefits are available with both federal and private student consolidations, but some come only with the federal consolidations.
It’s important to know that private education loans can’t be consolidated into a federal consolidation loans, but there are private lenders – not too many, though – that offer private consolidation of those private student loans.
Private consolidation loans can include federal education loans, however, including those federal loans in a private consolidation loan is usually not desirable for a number of reasons. For instance, with private consolidation, you will lose important, generous benefits of the federal loans, such as flexible repayment terms and loan forgiveness and cancellation provisions. Private consolidation will often increase your effective interest rate and you will pay much more to serve your education debt – even though you’ll get lower monthly payments.
For those reasons, it’s recommended to seek federal consolidation loans first, and only if you can’t get one, look for a private consolidation.
However, private lenders aren’t recently willing to consolidate student loans as they were some years ago. For two main reasons – first, the global credit crisis and second, the law passed recently by the Congress that significantly reduced the subsidies for providing education loans (including student consolidation loans).
The recent credit crunch debacle made the private lenders tighten their lending standards for the prospective borrowers applying for the student consolidation loans. The applicants now need higher credit scores and higher income. By the way, checking those is another important difference between federal and private consolidations. You will not be subject to any credit check and income-level test when asking for a federal student consolidation loan. On the other hand, it’s an important part of the private consolidation process – your credit rating will have a significant impact on the interest rate you’ll get. Therefore, it determines the total amount you’ll have to repay when you take the consolidation loan.
According to credit business sources, in order to be eligible for a private student consolidation loan and get an interest rate that will make the consolidation worthwhile, you will need a FICO credit score of 700 – at least 50 points higher than it was just a few years ago. Moreover, the private lenders require now your debt-to-income ratio to be much lower than 50%.
So what should you do if you really need to consolidate your student loans? Do you see the private consolidation loan as your only chance? Well, in order to improve your chance of getting one, you could use a co-signer, for example, your parents, or somebody who has a good credit rating.
Finally, it’s important to mention here some drawbacks that the borrowers who take student consolidation loans face.
First of all, if your main reason for seeking consolidation is to lower your monthly payments, you have to remember that while your monthly payments will be lower (sometimes by as much as 50%) and your finances will be simpler because you’ll have only one monthly payment, it will all come at a higher cost. Why? Because you will have to be stuck with the loan for a longer period of time. This means lower payments true but you will be paying for a longer period of time and the total amount of interest paid will be higher.
Here are some other issues to remember. If you take the consolidation loan, your grace period will often be shortened and you may also lose loan discounts provided by the originating lenders. Also, you may have to repay a fee waiver or rebate that you got from those lenders. And, if you have a Perkins loan, usually it is better to leave it alone and not consolidate it. Perkins loans have important benefits not found in other loans and they would be lost in consolidation.