Student Loan Consolidations: Advantages And Disadvantages
What Is Consolidation?
Student loan consolidation is a service introduced and governed by the federal government. It allows students to register all their debts that is the Stafford loans, PLUS loans into one single loan. The idea behind this is to reduce the monthly payments required from the students. However, the service also makes it easier for the federal government to keep track of all the loans taken by any single student. Many students have yet to understand the process of loan consolidation and how it can assist or make things harder for them. The loan consolidation policy has taken root in the American society, mainly being marketed as a simple way to reduce loan repayments. The recent global economic crisis has brought back the issue of loan consolidation back to political and economic debates. The crisis led to the cancellation of many consolidated loans, after which debtors realized that maybe the loan consolidation was not so much a benefit as a cost. Many people are now inclined to study and understand the effects that loan consolidation has on not just their monthly payments but also the entire repayment process. The consolidation takes into account all loans beginning with the parent loan that was initially used to pay for main tuition expenses and others that may have been acquired during the years for one reason or another. To the federal government, consolidation has brought the advantage of easy follow up. Whereas previously majority of the student loans went unpaid, and were constantly written off as bad debts, currently the task of following up loans has been made easier as creditors split this task making the cost and burden much easier to bare.
Benefits of Consolidation
The first and most highlighted advantage of student loan consolidation is of course the lower interest rates which eventually lead to much lower monthly rates. When a student has applied to different agencies for student loans, they are given individual rates that are profitable to the single agency. Each agency assumes that they are the only ones providing the student with assistance to complete their studies. However, once all the agencies are brought together through the loan consolidation process, repayment of the initial amount becomes the most paramount factor to be considered in which case, all the agencies negotiate with each other for lower rates so that repayment is possible. Once consolidated all agencies become aware of the total amount owed and what they will have to do in order to ensure the initial loan given to the student will be payable without crippling the debtor and rendering future repayments impossible. In the end when the loan repayment interests are configured and recalculated, one find that they are paying much less than they would have had they chosen to pay off the loans individually without consolidating them. In some cases debtors have found themselves paying amounts that are actually lower by even 50% of the initial monthly payments they were making.
Consolidation makes budgeting easier for the debtor since they now only have one payment to make rather than several payments that are increasing on a monthly basis. The student is left to contend with only one deduction from their income. This makes things easier for the debtor, who can now concentrate on furthering themselves socially and economically rather than focusing on making payments that cut so much into their income that in some cases, the debtor finds that they are working to pay off student loans and not to earn any form of income as one would imagine. This means that one went to schools to study on a loan, only to get a job to pay off the loan. Everything in the individual’s life revolves around the loan and they can therefore not focus on developing themselves economically or even continuing with further studies. Loan consolidation makes things easier for the debtor who can now focus on increasing income or furthering their education.
Loan consolidation programs are much more flexible than the initial individual loan repayment terms. Debtors can choose their own terms that include time scheduled for the loan repayment. Many credit agencies give short periods within which the loan can be repaid beginning with five years and ending with ten years. However, loan consolidation begins with ten years and goes even further up to 30 years. Students can generally pick the duration they feel comfortable with, to repay the loan. A longer repayment term automatically means reduced monthly payments for the debtor. The amount paid per month becomes more affordable and in fact does not even make a dent into the income earned by the debtor since the initial loan and interest are spread over a long time. On the other hand if the same loan were to be repaid in a short duration, the cost to the debtor could become crippling. There are many former students who have gone bankrupt and lost their assets because of the high monthly payments arising from student loans.
Ever Wonder What Consolidators Earn?
Like each and every company in existence, consolidators are in the business to earn money and make high profits. Rarely are these factors considered when choosing to consolidate the student loans. For each loan the consolidators negotiate, calculate and they are paid a consultancy fee. First the loan agencies pay the consolidators for repayment of the initial terms some percentage of the entire sum repaid. On the other hand, the debtors are charged a fee to have the loans consolidated. The fee is actually included in the monthly re-payments and therefore many people are not aware that they continue to pay the consolidators. Once the small amounts are combined over the period and schedule of repayment, the amount paid to the consolidators becomes quite high and unreasonable. In the past decade, loan consolidation has been highly and aggressively marketed by stakeholders including the federal government, as such many consolidation firms have recorded high percentage increase not just in income but also in profits. Some of the consolidators have actually recorded profit growth of up to 200%.
Disadvantage of Consolidating A Student Loan
The first disadvantage of student loan consolidation is that it automatically leads to loss of discharge benefits. Discharge benefits were introduced by the department of education and the federal government to reduce the financial burden on individuals who meet with sudden fatal calamities that reduce their ability to make income. For example should an individual employed by the army become disabled it means that they will be unable to remain employed by the institution since they cannot discharge the duties they were initially employed for. In such a case, the individual can apply for discharge benefits where the loan can either be repaid by the employer as he was injured during work, or completely scrapped off. Either way, the student loan burden is reduced significantly to the injured individual. In the same way, if for some other reason an individual remains unemployed for quite some time, they can apply to have the repayment schedule halted until such a time when they shall find new employment upon which the schedule may continue. However, with the loan consolidation program, this is not possible. Even when disables or unemployed, the debtor is expected to make the monthly payments. During the period of unemployment the loan sections are accrued and deducted in lump sum once the individual becomes employed again. The lump sum deductions can be crippling especially if the individual has been incapacitated or unemployed for months or years. Lump sum deductions have actually leave individuals financially crippled despite being employed or earning some sort of income that should be able to sustain them.
Another disadvantage of student loan consolidation is that you may actually end up paying so much more than what you would have initially paid off in the individual loans. Even though the interest rates are quite low with loan consolidation and the amount is spread over time, once the entire sum paid off during the repayment period is put together one comes to the realization that they may have actually paid so much more sometimes even double the amount they would have paid off had they stuck with the initial payments. The deal offered seems very colorful and exciting since the company’s focus on the lower monthly payments, however, before applying for any consolidation it is important to consider the calculations offered. Many people forget or ignore the importance of making the calculation yourself to see the end result of the amount of money you shall pay in lump sum. By making the simple calculation one can see if the consolidation will be to your benefit or to their benefit of the lender and consolidation firm. Remember that the lender would not agree to terms that would not be beneficial to them in the long term. Therefore ask yourself what is the advantage of the lender reducing interest rates and extending the payment period? There must be something that the lender is gaining from this terms and this as you shall see is the extra payments made over the long and extended payment period.
Some of the consolidation firms require that students take up additional loans for them to be provided with the loan consolidation service. In such a case, students find themselves taking on an additional liability whereas they are already having a problem handling the loans they have. Many students have found themselves in more debt than they can handle after taking on additional loans which take a long time to pay off and have very high interest rates. This is in addition to extended penalties when individuals fail to make prompt repayments. The terms of consolidation are often considered as inflexible, for example where students are penalized for not only making late payments but also for early payments. For example, if a student with a consolidated loan were to get a good job or a great source of income and would like to make repayment of their loan in lump sum or combine several payments into one, they often find themselves penalized for such an action, whereas in the individual loan repayments such an action would probably draw exciting discounts.
Many students choose loan consolidation because they assume it saves them money. Loan consolidation does offer low interests and therefore low monthly payments, coupled with payment schedules spread over a long time. For this reason individuals could find themselves saving up to 70% on their monthly payments. However, in the end the student pays much more than they borrowed with the original interest included. Therefore even with the monthly payments being reduced, loan consolidation does not help to save the debtor any money. In fact loan consolidation leads to more spending than would have been in the original plan. Before choosing loan consolidations, students need to study, research and understand the accrued benefits and disadvantage of consolidating loans. Based on the information gathered one is likely to make a wiser decision