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Together, they borrowed $ 1.5 trillion to get a degree, and it was not easy to repay it. About one in 10 default on their student loans, and although the average repayment period varies depending on the amount owed, it is safe to say that it will likely take at least 10 years and can take up to 30 years.
Members of the 2019 class who took out student loans owe an average of $ 31,172 and their payments are just under $ 400 a month. This is a significant and unwanted graduation gift, so it is important to know how to minimize the damage.
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If the money you borrowed was all federal loans, you can find easier repayment options by applying for a direct consolidation loan.
If some or all of your student loans come from private lenders, you will need to use a refinancing program to get similar results.
Consolidation is a way to make repayment of student loans more manageable and possibly cheaper. You combine all your student loans, take out a large consolidation loan and use it to pay off everyone else. You are left with a payment to a creditor every month.
The typical student borrower receives money from federal loan programs each semester at the school. It often comes from different creditors, so it is not uncommon to owe money to 8-10 separate creditors when you graduate. If you continue to borrow from graduate school, add another 4-6 lenders to the mix.
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Each of these student loans has its own maturity date, interest rate and payment amount. Keeping track of this type of schedule is tricky and part of the reason why many have failed. This is also why student loan consolidation is such an attractive solution.
Federal loans can be consolidated in the direct consolidation loan program. You combine all federal student loans into one fixed-rate loan. This interest rate is obtained by taking the average of the interest rates on all federal loans and rounding the interest rate to the nearest eighth of one percent.
While this method will not lower the interest rate you pay on federal loans, it will keep all repayment and forgiveness options open. Some lenders make it possible to lower the interest rate by making direct payments or qualify for a reduction by making payments on time over a longer period of time.
Student loan refinancing is similar to the direct consolidation loan program in that you pool all your student loans into one loan and make a single monthly payment, but there are important differences you should note before making a decision.
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Refinancing, sometimes called consolidation of private student loans, is primarily for private loans and can only be done through private banks, credit unions or online lenders. If you have borrowed from federal and private programs and want to consolidate the entire lot, this can only be done through a private lender.
The big difference between refinancing and Direct Loan Consolidation is that with refinancing you negotiate a fixed or variable interest rate that should be lower than what you paid for each loan individually. Lenders take into account your credit score and whether you have a guarantor when determining your interest rate.
However, if federal loans are part of your refinancing, you will miss out on the repayment options and forgiveness programs they offer, including deferral and patience. These last two things can be crucial if you have financial complications to pay off your loans.
There are many good reasons to consolidate through the Direct Loan Consolidation program, among which it keeps you alive for one of the income-based plans such as REPAYE (pay as you earn), PAYE (pay as you earn), IBR (income-based repayment) and ICR (conditional repayment).
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There are two sides to every story and here is the other side to consider before entering the direct loan consolidation program:
If you have missed payments because you are struggling to keep up with multiple loan providers and multiple payment dates, consolidation or refinancing is a valid choice. Making one payment a month instead of many payments makes life easier.
You can go through the direct loan consolidation program as it allows you to keep the door open for income-based payment options that result in lower monthly payments.
However, it is important to know that if your payments are part of qualifying for any forgiveness program, the clock will start again when you consolidate your loans. For example, if you make three years of qualifying payments for public service lending and then consolidate your loans, you will lose the three years of qualifying payments and the clock will start again.
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The big problem for most borrowers is that they can afford the monthly payment? This is what consolidation and refinancing are medicine for: giving you a payment that does not exceed your budget each month.
But if you make enough money right away and are very committed to paying off your loan, the fastest and most effective method is to follow the regular repayment schedule and do it in 10 years … or less!
Max Fay has been writing about personal finance for the past five years. His expertise is in student loans, credit cards and mortgages. Max has inherited a genetic predisposition to be fair with his money and free with financial advice. He was featured in all major Florida newspapers while working at Florida State University. He can be contacted at [email protected].
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