Student Loan Consolidation Rate in Federal and Private Consolidation
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Students and their parents can use student loan consolidation that will allow them combine their education loans into one loan from a single lender. That new loan – consolidation loan – will be then used to pay off the balances of the originating loans.
The process of consolidating student loans is similar to refinancing a mortgage. It’s a great way to improve own finances as it gives the borrower a number of benefits, such as: lower monthly payment, lower interest rate, longer repayment schedule, lack of application fees and of credit check as well as deferment and forbearance options.
Not all of those benefits are available in every consolidation loan; which of them a borrower receives depends on whether he or she takes a federal or private consolidation loan. While both federal and private consolidations provide similar results with regards to lowering monthly payments and longer repayment schedules, there are significant differences regarding the interest rates and deferment and forbearance options.
In this article I will discuss the issue of the student loan consolidation rate and how it is determined in federal and private consolidation.
First of all, it’s important to remember that usually it is not a good idea to include any of your federal education loans if you decide to take a private student consolidation loan. Why? For two main reasons. First, doing so may increase your effective interest rate and second, you will most likely lose a number of important borrower benefits, such as: flexible repayment terms, generous loan forgiveness, deferment, forbearance and cancellation provisions. In most cases, they don’t come with private student consolidation loans.
Interest rate is always among the most important factors in every loan as it determines the cost the borrower pays to the lender for using the money being borrowed. The higher the interest rate, the longer the total cost of taking the loan will be. Also, getting a fixed interest rate is preferable to a variable rate, as it is just much easier to live with the fixed rate and not to worry that it may significantly go up and negatively impact your financial well being.
Many people believe that all student loan consolidations – both federal and private – result in a fixed-interest rate loan. However, it’s only true for the federal student loan consolidations, but in most cases the private consolidations don’t feature fixed interest rates. Because the private consolidation loans belong to the consumer loans, they are credit-based and have to carry variable interest rates.
To the contrary, all federal student consolidation loans carry a fixed interest rates, because they are taxpayer-supported. They are government-funded and policed by the Department of Education (ED). Some of them are also directly provided by the ED; they are called “Direct Loans”. Those federal consolidation loans are based on government programs and not only the federal Direct Consolidation Loans (Direct Loans), but also the federal loans provided by private lenders under the FFELP (Federal Family Education Loan Program) follow the same formula for determining the fixed interest rates. That formula is simple – the fixed interest rate on a federal student consolidation loan is calculated as the weighted average of the interest rates on all loans that get consolidated. The result is then rounded up to the nearest 1/8th of a percent and capped at 8.25% (i.e. the federal loan interest rate can’t be higher than 8.25%). The fixed interest rate means that it is locked in for the whole term of the consolidated loan; it makes the life of the borrower much less stressful than that of somebody that has to take a private consolidation loan.
On the other hand, interest rates in most of the private consolidation loans are variable – they change during the length of the loan, according to the changes in the base. Those bases differ from loan to loan, but the lenders usually choose one of these – either the Prime Rate or the 3-month LIBOR Rate. The second one has been significantly lower over the last few years, thus it’s more advantageous for the borrowers. The lenders arrive at the final interest rate by adding a margin determined by the borrower’s credit rating.
There are a few ways available to the borrowers to bring down the consolidation loan interest rate and they are available in both federal and private consolidations. For example, you can get a 0.25% instant rate reduction when you agree to have your monthly loan payments direct-debited from your bank account. Later on, you may also earn another interest rate reduction if you continually make on-time monthly payments for a certain number of months (e.g., 24, or 36, or 48 months).
Any interest rate reduction will usually mean thousands of dollars in savings, so try as much as you can to use all opportunities to earn those reductions and save a lot of money.
Watch the video related
Watch the www.bills.com student loan consolidation video to discover the rules regarding federal and private student loan consolidation.
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7 Comments
September 29th, 2009 at 6:13 am
College is an investment. All investments involve RISK. College is the riskiest investment you can make. If you don’t think you can afford it, then DON’T GO! Spend your money on an iPod or on Blu-Ray discs or on a trip to Las Vegas.
September 29th, 2009 at 6:28 am
You'll be consolidating at the end of your education, if you struggle to pay different bills.
But do not consolidate with a private company before the end of your scholarship, because you start paying interests from the day you consolidate.
Good luck !
September 29th, 2009 at 6:30 am
You can ask Sallie Mae for a reduction in your interest rates, or you can try to consolidate with another company for a lower interest rate.
September 29th, 2009 at 6:58 pm
I'm sorry but I dont have an answer to your question but this was the only way to contact you! I had a question about the HOPE scholarship with housing and stuff (i saw your answer somewhere else). Don't mean to be a creeper, but it'd be really helpful if you got back to me. Thanks!
and sorry i couldn't answer your question!
September 29th, 2009 at 7:28 pm
Most lenders do not offer private loan consolidation, but you will find some out there who do. (Note: Private loans cannot be consolidated through the FFELP or Direct Loan programs.)
http://www.finaid.org (a great resource) offers a list of private loan consolidators, as well as some sound advice. Here is their list: http://www.finaid.org/loans/privateconsolidation.phtml.
Not to push a certain company, BUT, of the companies listed here, you might look first at Key Bank, Wells Fargo, and NelNet, as they are established education loan lenders. Some lenders on http://www.finaid.org's list may no longer offer private consolidation; others may require at least some of your loans to have been borrowed through them to begin with. Key Bank's program does not require that you have loans with them in order to consolidate with them now.
A few words of advice: You will rarely — if ever — obtain both a lower monthly payment and a lower interest rate. Generally, the longer your repayment term, the more you pay in the long run and the more "high risk" the loan is for a lender (hence, the higher rate). However, this is not unique to student loans (for example, auto loan rates work in a similar fashion). As you do your research, pay attention to the terms of the loan and the interest rate they are offering you. In consolidating your private loans, you should expect to see a slight increase in your interest rate; it is up to you to decide whether this increase is outweighed by the benefit of a lower monthly payment (if it helps you pay your other bills and preserves a good credit rating, the answer may be a resounding "yes"). Take advantage of any benefits that the company has to offer: consider having your payments automatically deducted from your checking/savings account each month — it can often save you .25% off your interest rate.
September 30th, 2009 at 6:39 am
Correct, you are unable to consolidate a federal & private loan into one. Right now, due to economics, it is difficult to get a decent rate with lenders across the board. Contact your Financial Aid office to see which lenders they are currently working with for both private & federal. When I did consolidate mine (federal), I checked out http://loanconsolidation.ed.gov & http://www.nelnet.com/. Those (2) are legitimate. It is easy to call them and speak with a consultant over the phone. Since you should be going into repayment, you may have to make the first few monthly payments until your paperwork has been processed. The consolidation advisors will walk you through everything as to how to contact your current provider or they may on your behalf before the loan goes into repayment.
October 2nd, 2009 at 1:35 pm
Consolidation is one of those things that you really must do your homework on before you make any decisions. It's a complicated financial proposition, and you really should sit down with a professional (or at least a very knowledgeable friend or relative) so that you can understand exactly how consolidation will affect you.
Consolidation loans are "sold" with 2 promises, both of which are true. The problem is what you're not told, and that's what you need to make sure you understand.
First of all, a consolidation loan does allow you to combine a bunch of loans all into one. This is part of how they're "sold": "Make just one payment a month! So convenient!"
That's true. A consolidation loan tears up all of your old loans, and replaces them with one mega-loan. The new loan has all new terms and conditions (keep that in mind).
Second of all, you're told that a consolidation loan may just save you "hundreds of dollars a month in payments!".
That's true, too. But here's where the story starts to go off the rails.
You say you owe $68,000. If you leave it the way it is, or if shop it around to another lender, you're still dealing with a debt of $68,000. So now ask yourself this – if a new lender comes along and promises you that you can pay less every month, how is this possible?
And the answer is….
You're going to make those payments for a lot longer than you're currently scheduled to make them now. If I owe you $100 and pay $50 a month, I've paid you off in 2 months. If you agree to accept $10 a month, I'll be making payments for the next 10 months instead.
That all sounds nice, except you're forgetting one thing. YOUR loan accrues interest. The longer it takes you to pay, the more interest accrues on the balance. There's the really big problem with consolidation loans – you might make lower payments every month, sure, but you'll make those lower payments for a LOT longer, and in the end, you will have paid back a LOT more money. That's the "cost" of stretching out your repayment period.
What's a "lot" more money? On your $68,000 loan – who knows, we could be talking about ten, twenty or thirty thousand dollars MORE.
Here's the other problem – I referred to it earlier. Your existing loans have terms that may (or may not) be more favorable to you then the terms you can get on your new mega-loan. It's not just what your current rate is that matters, it's also important to keep tabs of what your ceiling is. I'm assuming that your loans have an interest rate "cap". Moving to a new loan may bring you a higher cap, and I think it's pretty to safe believe that interest rates are going to be heading upwards – certainly over the next 15 years or so, while you're be paying back your loans. You need to make sure that you're not turning loans with a 10.5% interest rate cap into a new mega-loan with a 15% cap.
Never forget that anyone who is offering to consolidate your loans is doing it for one reason only. They see an opportunity to make money. No lender is your friend – everyone of them is a business. Some of them spend an awful lot of time telling you how much they want to help you – you can trust that the relationship is actually a little more one sided in the other direction, than that.
As I said – do your homework. If you've been in school a while, hopefully you've developed a passion for learning – apply that to learning about your financial options. For many people, consolidation is NOT a good idea. The only way to find out is to do your own research, and not listen to the siren song of the lending companies.
I hope that helped you – good luck!