How Does Private Student Loan Consolidation Work?

How Does Private Student Loan Consolidation Work?

Many times, attending college is not be possible without the help of student loans. Guaranteed by the government, private student loans provide low interest rates to eligible students who are unable to afford a college education without financial assistance. With the cost of education now averaging well over $10,000 per year, however, many students need more than just one loan in order to complete four years of education. As a result, by the time graduation rolls around, many former students have amassed a large amount of debt through multiple student loans. Fortunately, through a student loan consolidation program, students can easily pay back several loans via one convenient monthly payment.

What Is a Private Student Loan?

For students who are not eligible to receive federal financial aid or whose financial aid package does not cover the full cost of their education, private student loans are an easy solution. Unlike federal student loans, the applicant does not need to complete the Free Application for Federal Student Aid (FAFSA) and there is no deadline for the application. Additionally, whereas federal student loans only cover the costs of boarding and tuition, private student loans can be used toward transportation, books, school supplies and computers. It should be noted, however, that in order to receive a private student loan, the applicant must pass a credit check for each loan he or she receives.

What Is Student Loan Consolidation?

After completing college, a student borrower has a 6-month grace period before her first loan payment is due (meaning no payment is due until 6 months after graduation). If more than one loan was taken out, each payment must be made separately. For example, if you take out one loan for each of the four years you're in school, when the time comes to pay them back, you'll have four different loans, each with its own payment terms and its own account number. And for graduate students, chances are they'll have even more than four loans! Rather than making separate payments, student loan consolidation simply combines all of the applicant's student loans (up to $150,000 for undergraduates and $250,000 for graduate students) into one large loan. So, rather than having to make multiple payments, the student can simply make one payment over the life of the loan (see Resources below).

Why Consolidate?

Consolidating your loans is not only much more convenient, but the program can also save time and money. Although the interest rates can be higher for private student loan consolidation, the program can reduce monthly payments by as much as 50 percent, which for many students (especially new graduates) is more important than paying a little higher interest rate. Designed to be paid off within 25 to 30 years, many consolidation programs also offer rewards such as reduced interest rates for on time payments or improved credit scores. And, should you ever have enough cash on hand to pay it off, there is no prepayment penalty for consolidated loans, so you might not even be affected by the increased interest rate.

Resources

• Comparison of Student Loan Consolidation