Why Get a Private Student Loan Consolidation?
Consolidating Private Education Loans May Lower Monthly Payments
© John Wu
Aug 23, 2009
If a borrower with private student loans checks his credit and sees that it has improved 50 points or more, he should consider getting a private student loan consolidation. A borrower who needs to lower the monthly payment on his private student loans should also consider a private consolidation loan into a lower single monthly payment.
Lower Interest Rate
Private student loan consolidations are credit based loans. Although the interest rates from private student loan lenders are mostly identical from lender to lender, they are determined based upon the borrower's credit score. This means a borrower's improved credit score may lower the interest rate existing private student loan balances.
Another strategy to lower the interest rate is to add a co-signer who has a better FICO score than the student borrower. Although finding a willing a co-signer with excellent credit can be very hard to find, it could result in thousands of dollars worth of less interest paid.
Lower Monthly Student Loan Payment
Consolidation resets the clock on private student loans, which can lower monthly payments by extending the term of private student loans by up to 30 years. Depending on the repayment options offered by the lender, monthly payments can further be reduced with other repayment options. For example, the graduated repayment plan lowers the early payments.further while increasing the size of later payments. Although interest rates are generally the same from lender to lender, differences in repayment plans can decrease monthly.
Another benefit of consolidating is having to send only one payment per month for all private student loan balances instead of sending multiple payments every month to each lender.
A lower monthly payment improves the borrower's debt to income ratio, which may allow the borrower to qualify for other loans, such as a mortgage.
Disadvantages of Consolidating
Although private student loan consolidation is usually beneficial, there are a few disadvantages to consolidating.
- Extending repayment of student loans may increase the total amount of interest paid over the lifetime of the private student loans. However, students may pay additional amounts over the minimum monthly payment to help payoff the loan sooner.
- If the borrower's credit is worse at the time of the consolidation, the interest rate on a consolidation loan could be higher than the original private student loans. The higher interest rate will make borrowers pay more money in the long run to payoff the consolidated student loan, even if the consolidated loan resulted in a lower monthly payment.
- Finally, if adding a co-signer was necessary, the co-signer is now on the hook for the consolidated student loan for up to 30 years. A default of the consolidated student loan will negatively affect two people instead of just one.
Depending on each borrower's situation, getting private student loans consolidated could be quite advantageous, but it needs to be weighed against the disadvantages that are not always apparent.
Reference:
Adams, Katie. "Should You Consolidate Your Student Loans?" Investopedia - Forbes Digital.
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