For many students with federal student loans, consolidation can be a great way to save money on both the amount of interest rate they pay and their monthly payment. Few students really understand how the consolidation process works, however, or how it can benefit them.
Direct loan consolidation is a process in which a bank takes all of a former student’s direct loans and bundles them together as a single loan with one payment. This new loan can have a lower interest rate than the previous loans, and a longer payment term if desired.
For many students, loan consolidation is a great way to get some relief on their student loans. Many recent graduates feel trapped by the high amount of debt they have taken on through student loans. A typical graduate has nearly $24,000 in student loans for a Bachelor’s degree. In this harsh job market, many of these former students are considered to be underemployed; that is, they are working part-time and/or below their skill level. This means that many students are not making enough money to meet the minimum obligation on their student loans.
To make matters worse, many people do not discover until it is too late that they cannot discharge their student loans in a bankruptcy. Unlike practically every other type of debt, a person who cannot pay their student loans has no way of legally getting rid of them. This means a borrower has to find some way to make their payments or risk having their wages, tax refunds, and even their Social Security checks garnished.
Fortunately, consolidating student loans can be a good way for a former student to lower their debt burden without running the risk of legal trouble. Anyone considering this option, however, should act quickly. On July 1st, federal student loan interest rates are set to go up unless Congress acts quickly to stop them.
The interest rates on federal student loans are set by Congress each year. Currently, they are at historically low levels, but unless Congress approves legislation to keep these rates low, they are set to double on July 1st.
This decision will affect anyone who currently has a student loan, even if they graduated years ago. The interest rates on federal student loans are variable; that is, they adjust to whatever rate the United States Congress sets them to. Since the payment term on these loans does not change, when rates drop, a borrower’s monthly payment will decrease. When rates rise, a borrower’s monthly payment will increase.
If you are currently facing the possibility of not being able to pay your student loans because of a rise in rates, consolidation may be a good option for you. Be sure to research this option carefully, however, since borrowers are only allowed to consolidate their direct loans once. Consolidation is an important decision, but one that can help you to become more financially independent and get your student loans finally paid off.