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What repayment option is the best for my college loans?

I graduated with my bachelor degree three months ago and got a job last month. I have started to make plans on how I’ll repay for my college loans, which I should begin in three months. I have three loans; two are federal one while one is a private loan. Though the government offers low student loan consolidation rates, I can only combine two of my loans in the federal student loan consolidation plan. Can I use a private student loan consolidation for all of them? What is the best repayment plan?

Timothy Norman

in Student Loans

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Bethany Evans on April 30, 2018

Yes, you can use private student loans consolidation plans to consolidate all your loans into one. This form of combining all your loans with a private servicer is also known as refinancing. A refinancing plan works this way: you take up a new longer loan to pay off all your three loans. Therefore, you remain with repayments for the new loan, which are substantially lower.

It is quite tricky to get a financial institution that allows for this kind of repayment. The ones that offer demand a nearly perfect credit score among other prerequisites. If you find a private lender that is willing to re-financing your college student loans, look closely at the following factors:

  •    The interest rate amount for the new loan. For consolidation to make economic sense, the interest charged on the new larger loan should be lower than what you were to pay for all your three loans.

Some students tend to ignore this because of the lower monthly payments offered by new package. However, if you pay a higher interest than before and for a longer time, you will eventually pay a higher total amount to complete your loan.

  •    If the interest rate is fixed or variable. The government charges students fixed interest rates on consolidated federal student loans even if the loan takes 10 years to repay. Therefore, students do not have to fret about their loan amounts getting higher in the future due to interest shifts in the market.

However, you may find that some private lenders have variable students loan consolidation rates which means that your monthly payments may increase when interest goes up.

  •    Your loan payoff amounts. Consider how much you will be paying monthly and for how long. This number should be a figure that you can comfortably afford to deduct from your monthly income.

In some cases, a loan may require you to pay lower amounts for a specified period; then the payments increase every two or so years. Be sure to read the fine print.

  •    The lender’s repayment options. Your lender should have flexible repayment plans. Plus, you should be able to switch from one plan to another if you can adequately provide reasons.
  •    Tax Consequences. Students with federal loans can enjoy lower loan interest from tax deductions. If you intend to claim these deductions, find out if your new private loan will allow you to claim this benefit.

Tad Frazier2 years ago

You should be careful before you consolidate your college loans with a private lender. Consolidation offers lower monthly repayments but a more extended repayment period. Eventually, you will pay more overall interest costs over the life of your loan.

However, the most worrying factor is that you stand to lose most of the benefits and rights associated with federal student loans. For example, employees in the public service sector are eligible for consideration in the student loan forgiveness program.

I would recommend you consolidate your two federal loans to a Direct Consolidation Loan. Students can only consolidate their loans in this plan during the 6-month grace period (defaulters can do so under exceptional circumstances). Then, pay for the private loan as your second loan. Consolidating all these loans into one would only make sense if your third private loan has prohibitively high interest. Hence you want a lower overall interest.


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