Student Loans: Consolidation Strategies to Consider

Student loan consolidation is a strategy to reduce the burden of your debt and streamline the repayment process. Consolidation means taking one large loan to cover the balances of existing debt. Once the smaller debts are paid off, you only need to focus on this new loan sum moving forward. The smaller debts are paid off through a combination of settlement and prepayment. Consolidating student loans is not always the best option, but it can be appropriate in certain scenarios.

Consolidating Federal Student Loans

First, if you have federal student loans, consolidation is always an option. There is no penalty to consolidate federal debts. You may have several loans, each taken for a different semester or year of college, and tracking the many loans can be challenging. Instead of continuing to repay multiple debts to this one lender, consider entering the federal student loan consolidation program. The sum you own on your loans will not be reduced, but the process to repay the debts will be simplified. You can also change the repayment terms on your loans during the consolidation process to help you manage the debt more effectively.

Consolidating and Refinancing

Consolidation can be a good choice if you feel you can capitalize on lower interest rates today than those you received when you first took the loan. For example, you may have taken your student loans when you were an undergraduate student with no credit history and no income. You likely received higher than average interest rates. Today, you have paid off a portion of your debts, and your financial profile is enhanced through your salary and credit history. Taking a new consolidation loan may allow you to secure better interest rates and terms, reducing the cost of your financing over time. The same can be true if the economy has improved since the time you took your loans.

Consolidating and Settling

If you need to rapidly reduce your total debt, consider settlement options. Settling a debt means paying it off for less than the total remaining balance on the loan. You will rarely be able to settle for an amount lower than the principal sum remaining, but you may be able to settle away some debt due to interest or financing fees. Your consolidation lender can negotiate payments with your existing lenders, and you will ultimately owe far less to the consolidation lender than you would if you continued to pay your loans on schedule.

Consolidating for Rapid Repayment

If you do not want to settle debts, which could result in credit penalties, consider using consolidation as a way to rapidly repay multiple debts. This option is best for an individual who has had a change in his or her ability to pay and can pay off debts sooner than anticipated. Prepay each of your debts through the consolidation program. Elect a very short loan cycle on the new consolidation loan. You will face high monthly payments, but your interest rate will be lower when you elect shorter terms. In this method, you will owe less over time, and you can free yourself from debt faster.


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