Student Loan Consolidation Options During a Slow Economy

Student loan consolidation can allow a borrower to pay off multiple debts with one new loan at a lower interest rate. Students often seek this option during a recession because they are not able to locate jobs easily. This means they have high debt loads without an income, often making it impossible to meet monthly payment requirements. Students who have more than one source of debt can consolidate to lower monthly payments and ease the burden of repaying the cost of college.

Student Loan Deferral

Before consolidating, you can speak with lenders regarding the option to defer payment. In a recession, it is common for lenders to extend deferral options because they know the job market is weak. Typically, you must prove financial hardship in order to succeed in deferring your payments. For example, if you were offered a job which has been suspended until a later time, you can argue for financial hardship. Different lenders will have unique policies, but some of these deferral options will be interest free. If your student loans are federal loans, you have a better chance of interest-free deferral.

Consolidating Two or More Student Loans

Many students will have more than one student loan lender. For example, a student may be partially financed by the government and partially be seeking private student loan consolidation. Your new lender will negotiate each loan settlement independently, meaning it doesn't matter if you have more than one student loan lender. It is also possible to consolidate undergraduate and graduate student loans. Instead of two separate monthly payments, you will be paying just one lender. In a recession, the interest rate has usually dropped, meaning you will typically get a better loan rate than you originally secured on your undergraduate loan.

Consolidating Different Types of Loans

You may also look to consolidate loans that are not for school with those that are for school. For example, if you have a car loan, you can consolidate it with your student loan in one maneuver. This will allow you again to pay only one lender each month instead of a car lender and a student loan lender independently. It may be challenging to negotiate this type of consolidation because student loans and car loans typically have very different interest rates. However, lenders are more willing to negotiate in a recession because they would like to see money back on the loan instead of having the loan default.

Disadvantages of Consolidation

There are disadvantages you modify a loan. You will have high prepayment fees with your private student loan lenders. Federal loans do not typically assess prepayment fees. You will also have bad terms on the new loan. In a recession, many lenders fear loan modification, and your new lender will be aware of this in your loan terms. Further, when you modify a loan, the lender notifies the credit bureaus. Your credit score will drop. You will also have a black mark on your credit history. This will mostly affect those borrowers who will be seeking another loan in the near future. It can be very difficult to secure new loans in a recession, and this drop in credit will make it even harder.

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