College Life

Student Loan Consolidation 101: Because it’s confusing!

Most students use education loans to help pay for college, and taking out a new loan or two each semester is the norm. By graduation, many new grads have up to 12 different loans to keep track of…each with its own interest rate and payoff date. Consolidating these loans is a way to make your debt more manageable, and offer your budget some breathing room if it needs it.

Get a smaller monthly payment.

You’re not alone if your budget is stretched thin making the minimum payment on your loans. Many students graduate college into an uncertain economy and struggle to make lofty monthly student loan payments. Defaulting on a loan can cause severe repercussions to your credit score. If you’re in danger of defaulting, consolidation may allow you to select a longer repayment term and make your monthly payment smaller. Consolidation can also be a better option than deferring payments because in deferment, interest continues to compound and add to the overall cost of the loan. An additional benefit of an iHELP loan is that borrowers can request 24 months of interest-only payments or a graduated repayment schedule to accommodate a financial burden.

Potentially lock in a lower interest rate.

Factors such as your credit score determine your new interest rate when you consolidate. So, some borrowers are actually able to qualify for a lower interest rate. Also, you may choose to only consolidate some of your loans. For instance, if one of your loans has a drastically lower interest rate than the others, it may benefit you to keep it separate from the loans you consolidate. Do the math both ways to determine what works best for you.

Less hassle with one monthly payment.

Life is busy, especially after college, and it can be overwhelming to juggle multiple loans. Missing just one payment will hurt your credit score. So paying one bill a month instead of several should lessen that chance and keep your credit in good standing. Consolidation helps borrowers get organized with their debt, and gives them one less thing to worry about.

Fixed or variable rates are available.

Some lenders, such as iHELP, let borrowers choose between a fixed or variable student loan interest rate. Here’s the difference:

  • Fixed rate loans have a set interest rate that doesn’t change over the life of the loan. If you assume interest rates will increase over time, a fixed rate could lock in you at a low rate. Another benefit of fixed rates is they are easy to budget for, since the payment won’t increase or decrease. iHELP currently offers 10 year fixed rates which range from 4.75% to 8.00% and a 15 year fixed rates which range from 5.50% to 9.00%.
  • Variable rate loans have an interest rate that fluctuates with the market, increasing or decreased based on the economy. An iHELP variable rate consolidation student loan is based upon the three month LIBOR (London Interbank Offer Rate) and is rounded to the nearest one-eighth of one percent, 0.125%. A 20 year variable rate currently ranges from LIBOR + 2.5% to LIBOR + 8.50%. The three month LIBOR rate is published in the Wall Street Journal. It is among the most common of benchmark interest rate indexes used to make adjustments to variable rate loans.

Since you can’t predict the economy, the choice comes down to your appetite for risk. You may be able to get a lower initial rate, but there’s no guarantee rates will stay low.

Federal and private loans are eligible for consolidation.

Some lenders such as iHELP allow you to consolidate both federal and private student loans into a single consolidation loan. You can usually consolidate once your loans, or at least one of your federal loans, is in repayment status or the grace period.

Let your cosigner off the hook early.

If a relative or friend cosigned your loans in college, consolidation is one way to remove them from the loan. While cosigners aren’t required, they can help a borrower qualify for student loan consolidation and/or a lower interest rate. In that case, iHEP offers early cosigner release. Cosigners may be eligible for release after 24 consecutive, on-time payments, provided the borrower can meet the credit requirements at that time.

Do you have more questions? Feel free to ask us!

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