How Student Loan Consolidation Differs from Standard Debt Consolidation

Borrowers who have multiple debts over years of college may consider student loan consolidation to make payments more manageable. In many ways, student loan consolidation is just like standard debt consolidation; a new loan is issued in a sum large enough to cover previous loans, and this new loan is then paid off over time. There are a few key differences, however, that make student loan consolidation slightly easier and more beneficial than standard debt consolidation.

Consolidating Federal Student Loans

First, if you have federal student loans, then you should be aware there is an entirely different process for consolidating this debt. You will want to use federal loan consolidation options because they pose the greatest benefit to you. You will be able to consolidate without any prepayment fees. You can also arrange a new payment schedule easily, and you may even find some of your debt can be settled through the process. This applies to both students themselves and parents who have taken PLUS loans.

How Student Loans are Issued

The way student loans are issued contributes to the way they are consolidated. Most loans are distributed each term or each semester. Few are given for the entire four years of college. This happens because the loan sums are issued according to the cost of tuition, and tuition may fluctuate year-to-year. As a result, the majority of students who paid for college through loans will have multiple debts across each year. They may be issued by the same lender, but they will still be unique loan contracts. As such, it is normal for a student to wish to consolidate all of these loans. Since a student is paying multiple bills to one lender each month, it simply makes sense to reduce this into one bill.

How Student Loans are Consolidated

Student loans are typically consolidated in a very straightforward manner. Since it is a standard process, you will not find you have to jump through as many hoops to get the consolidation approved. The major exception will be if you are attempting to combine many types of debt into one. This would occur, for example, if you also had credit card debt accumulated during the time you were in school. While it may be possible to consolidate this with your loans, the different debt structure between the two can make this process challenging.

How Student Loans are Paid Off

Student loans have some of the most flexible payment structures of all loan types. You can elect from standard repayment, extended repayment, graduated repayment and income contingent repayment on most student loans. You will also have an easier time deferring student loans if you experience a hardship than you will standard debt. This flexibility is due to the fact student loans have a low rate of default. Lenders will be flexible, typically, in providing you the options that help you pay off the loans over time. They also make more money if they allow you to delay payment, so there is not a real downside to permitting for a lengthened contract through consolidation.

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