The Advantages of Consolidating Student Debt
Consolidating student debt means combining numerous student loans into a single loan. This new loan can have different repayment terms than the original loans, which can provide several advantages that make it easier for you to make your student loan payments. Federal and private loans cannot be consolidated together, however, individual federal or private loans can be consolidated with like loans.
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Lock in Interest Rates
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Federal student loans taken out before 2006 have a variable interest. In 2006, newly disbursed federal student loans were changed over to a fixed interest rate. By consolidating your older loans, you can take advantage of the new fixed interest rate terms. This can save you money if your current interest rate is higher than the 6.8 percent currently set by the federal government, and guarantees you have consistent interest charges and payments.
Simplify Your Payments
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Because student loans are disbursed by the semester, and you can take out more than one loan each semester, you may be paying eight or more different loans off. This means sending eight or more different payments each month and a larger number of payments means a greater chance of forgetting one or sending a payment late. By consolidating your loans you have just one payment to make on your federal student loans. Private loans must be consolidated separately.
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Extend Your Repayment Time
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Ten years is the standard repayment period for student loans. However, if you've taken out a large volume of student loans you may find making the payments for all those loans to be difficult. In this case, you may want to consolidate your loans and seek a longer repayment period on your new loan of 15, 20 or even 30 years. A longer repayment period reduces your monthly payments. However, you end up paying much more in interest over the life of the loan.
Alternate Payment Schedules
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When consolidating your loans you can choose from alternate payment schedules, including graduated repayment and income contingent repayment. Graduated repayments starts with payments below the normal level and they increase every two years until they are higher than normal. This plan is a good option if you can't afford the normal payments now, but expect to have a substantially higher wage in the future. Income contingent repayment raises or lowers monthly payments based on your current income level with a maximum repayment period of 25 years, after which any remaining balance is discharged. However, this option is only available for federal student loans. The downside to these alternatives is that the extended terms and lower early payments result in more interest being charged.
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