Student Loan Consolidation: A Welcome Relief

New college graduates armed with the potential to earn fat paychecks dream of home ownership. They think of purchasing fancy cars and whatever else their new spending powers allow. Those dreams are short lived, at least for some time, when they’re confronted with the crippling reality of repaying student loans. Student loan consolidation furnishes a welcome life line for students looking for a way out of insurmountable debt.

The Consumer Financial Protection Bureau in April 2012 reported the total outstanding student loan debt as being just over $1 trillion. One trillion! That’s more than the amount owed by all the credit card holders in the United States. That alone should convey just how BIG the problem with student loans really is.

Student debt was one of the major issues in the presidential race between President Obama and Mitt Romney. That should also convince you of the enormity of the problem.

Students last year took out a whopping $117 billion in federal loans. They really had no choice. Without these loans the rising costs of public, not to mention private, education would put a college education out of the reach of many citizens.

Once out of college students are faced with making monthly payments that are in many cases as high as a mortgage payment.  Financial institutions are thus unwilling to fund mortgages to these first time buyers because the addition of a mortgage would significantly raise their debt. The guidelines dictating limits on debts would immediately disqualify persons whose credit card payments, car loans and student loans take up a significant part of their income. Include a mortgage and tax payments from receiving a mortgage and they’ll be well over the limit. The general rule is that total debt owed should be less than 45% of one’s income.

Graduates therefore have to find ways to lower their monthly student loan payments if they hope to qualify for a car loan, mortgage or those other niceties in life. One solution is to consolidate their student loans. Student loan consolidation will extend the length of the loans but lower monthly payments. A mortgage or car loan could then be within reach.

Debt consolidators typically offer rates as low as 3-5% with repayment terms of up to 25 years. While that may seem like a bottomless pit to many it is the only way that some graduates can move on with life. Jenny Stewart, a graduate of New York University, can relate. Getting the loans for tuition proved rather simple. She didn’t think about the amount that she would one day have to pay back, not until one month before the due date for loan repayment. Student loan consolidation gave her a way to simplify her finances and lower her monthly loan payment.

Ms. Stewart, like many other graduates, recognizes that there is something to be said for student debt consolidation. It is not suitable for every instance though. For instance, consolidation won’t lower the interest rate on Federal loans which now carry a fixed interest rate. Even so graduates use loan consolidation to:

• Save money on variable rate private loans.
• Remove the co-signer of the loans thereby freeing parents or other relatives from liability.
• Streamline their monthly bill payments so that one payment covers multiple loans.
• Extend the length of their repayment term especially if they anticipate changes in their income.
• Lower the monthly payment in order to qualify for other loans such as mortgages.

These benefits serve the graduate well in the long run. Negotiating new terms on their loans make it possible to pay on time and without defaults. In the long run it will improve their credit scores and financial outlook and give them a better quality of life.

If you want to consolidate your student loans you should always ask the consolidator about any origination fees, prepayment penalties and what the maximum interest rate will be. Read carefully the terms and conditions and have someone read it for you as well. Most important is the need to ask questions for clarity on the things that you don’t understand.