nv Non-Federal Student Loan Consolidation: Benefits and Drawbacks

Non-federal student loan consolidation programs are designed to assist borrowers with a way to lower their interest costs. Consolidation means that a borrower combines all of their outstanding student loan obligations into one single payment plan. This makes loan repayment easier and should presumably lower interest costs for the borrower.

About Non-Federal Student Loans    

Private lenders such as banks and other financial institutions or organizations that specialize in student loan lending offer non-federal student loans. These programs are not sponsored or guaranteed by the federal government through the U.S. Department of Education. They differ from federal programs such as the Stafford and PLUS loan programs in that they are not subject to borrowing limits, income requirements or credit qualifications. Non-federal student loan programs are available to both people with good and bad credit.

Loan Consolidation

Consolidating a loan requires the borrower to find a lender willing to take the outstanding loan obligations of the student or borrower and combine them into a single loan through refinancing. This makes sense for the borrower who has several high interest rate loans that they may be repaying in relationship to loans with a lower rate of interest. The consolidation of the lower rate loans with the higher interest rate loans will result in an overall interest rate reduction for the borrower.

The Benefit of Loan Consolidation

For example, a borrower has 4 loans outstanding of $10,000 each that have respective interest rates of 12 percent, 10 percent, 5 percent and 4 percent. If the loan has a 10-year repayment period, their combined interest rate is 7.89 percent on $40,000 borrowed. Their monthly cost would be $482.93 for a total payment of $57,952 after 10 years.

Consolidating the 4 loans at a lower interest rate of say 7 percent for the same 10 years would result in a monthly payment of $464.43 and a total payment of $55,732.  The borrower reduced their monthly cost by $18.50 and their total loan payments by $2,220.

Loan Consolidation Drawbacks

Loan consolidation does require the borrower to qualify based on their credit in order to obtain a lower interest rate. This may present a problem for some borrowers who have experienced some financial difficulties between the time they took out the loan and sought to consolidate the loan. The loan consolidation can also have fees and other costs associated with the administrative work necessary to create the new loan.

For many borrowers, seeking loan consolidation may make sense, particularly when interest rates are lower. This gives the borrower the opportunity to swap old high interest rate loans for ones that result in a lower interest cost and monthly payments. The borrower should compare the terms of the new loan with those of their existing non-federal student loans to determine the benefit of loan consolidation relative to the costs associated with consolidating the loan.

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