Consolidated loans are the best way to tackle the problem of multiple repayments as it provides the benefits of lower interest rates as well as extended period of repayment. But a few details should be considered before combining one's loans with the provision of private student loan consolidation.
As higher education gets expensive with each passing year, student loans have definitely proved as a convenient source for the students and parents who are not so financially strong. Private student loan consolidation is an effective way to merge one's loan repayments in order to reduce the stress of multiple payments. It also lowers down the 
With advancements in the field of science, technology and business, higher education is now one of the most important factors which employers look for. The cost of education has increased sharply in the past few decades because of the involvement of private players. To bear these expenses, many parents and students opt for a loan which is paid back in certain period of time and with due interest. If a student takes multiple loans in order to finance his studies, there is always a problem in paying multiple monthly installments. To assist him, there is the provision of private student loan consolidation, with the help of which he can combine all his loans from a single lender and make a single monthly payment. It also sorts the inconvenience of going to different places and dealing with different authorities in order to make all the defrayals.
Almost all the federal loans can be consolidated to form a single repayment scheme with a fixed interest. There are many programs like FISL, Perkins, HEAL, NSL, Guaranteed Student Loans, Direct loans and FFELP(Stafford, PLUS, SLS) under which students can apply for a loan. These financial aid package generally includes a combination of grants, scholarships, work-study packages and recommended loan amount. There a some lenders which offer the provision of loan consolidation on private education loans too. Both student and parent borrowers can consolidate their loans. However they cannot inter-combine their loans as consolidation is individual specific. In case of married students consolidating their loans together, each spouse becomes responsible for the full amount of the loan, and the loans cannot be separated if the couple gets divorced.
Suppose a borrower has taken three loans at a time and wishes to consolidate them. The interest rate on a consolidation loan is the weighted average of the interest rates on the respective loans along with the principal amount. It is rounded up to the nearest 1/8 of a percent and capped at 8.25% which means the maximum rate of interest can be 8.25%. In this case let us suppose that the principal amounts and their respective rates of interest are as follows:
Loans
Balance
Rate of Interest
Loan A
$5000
5.2%
Loan B
$4000
6.5%
Loan C
$7000
6.1%
The weighted average rate of interest comes out to be ((5000*5.2%)+(4000*6.5%)+(7000*6.1%)) / (5000+4000+7000)= 5.91% which on being rounded off to 1/8 of a percent results in the fixed 5.875% consolidated rate of interest. Now let's take a look at whether the borrower has really saved anything in his pocket. The total amount he has taken as loan is $16000 ($5000+$4000+$70000). If he pays the individual loans at their respective interests he will have to repay a total amount of $16947; whereas if he makes the consolidated payment for $16000 at the fixed rate of 5.875% in a span of 15 years, he will have to pay $16940 saving $7. This might not sound a very promising offer to few, but when huge amounts are involved, these consolidated loans do make a difference.
There are different plans when it comes to consolidated loans repayment. Besides standard repayment which is of 10 years, there are also schemes like graduated repayment, income contingent repayment (Direct Loans only), extended repayment and income sensitive repayment (FFEL only). There is also provision of extending the loan term from 12 to 30 years. The total amount of interest paid will increase unless one continues to make the same monthly payment as before, which decreases the amount of interest to be paid. So while opting for the Private student loan consolidation one should always keep in mind the following benefits and drawbacks:
Benefits
- Lower overall payment as compared to the amount which has to be paid considering individual loans.
- Reduced interest rate.
- Longer span of time for repayment
- All payments in excess of scheduled payments go directly to principal so there is no issue of prepayment penalty.
Drawbacks
- As the consolidated rate of interest is fixed, one may be paying more amount if there is a sharp dip in the interest rate in market.
- Even if the monthly payments are lower, one might end up paying more because of the extending time of the loan.
- The perks offered for EFT(electronic funds transfer) and on time payments tend to be less for loan consolidation holders.
Before availing this facility of loan consolidation, one should always look at the pros and cons and decide accordingly. He should also calculate the amount he'll have to pay after consolidating his loans and whether the profits will be significant in long run.
By Swapnil Srivastava
