College graduation signifies many promising life changes – budding careers, independence and new beginnings. However, it means the beginning of something altogether less enjoyable, too – student loan repayment.
Repayment of sizeable student loans can be daunting for some students and their parents. As per recent analysis by the Public Interest Research Group, the average debt among student borrowers is now in excess of $16,500.
According to the Associated Press,graduates of public universities and colleges typically emerge owing more than $10,000 for their undergraduate years, while graduates of private schools usually owe $14,000. Graduate-level students often owe more than $24,000, while those studying medicine or law can accumulate even more debt. In the midst of uncertain job and stock markets and the recession, it is growing even more difficult for graduates to repay these loans.
For this reason, and due to a 36-year low in interest rates, consolidation loans are growing in popularity as debt-management tools. The rates on federally guaranteed loans, which change annually based on the three-month Treasury bill, dropped July 1, 2002 to the lowest level in years.
"Since interest rates on all federal programs are now at record lows, it is a great time for students and graduates to consider consolidation," said Rob Creel, vice president of NextStudent®, a service organization providing students, parents and families with information necessary to understand college finance. According to Creel, students and graduates can save thousands in interest charges by consolidating their original student loans into a single fixed-rate loan.
Federal student loans such as Stafford Subsidized and Unsubsidized Loans, carry a variable interest rate that is adjusted annually. Federal consolidation loans, however, are fixed for the life of the loan. Students who refinance with consolidation loans can lock in a lower fixed interest rate — up to 4 percent lower — than their previous variable rate.
Borrowers in their grace period or currently in repayment of their federal student loans are eligible to consolidate. Some of the advantages of consolidation include retention of deferment and forbearance benefits, extended repayment programs and drastically lower monthly payments. Also, federal student loan consolidation improves a borrower’s credit score by replacing multiple lenders with a single lender holding the borrower’s new consolidation loan.
For example, on a $40,000 loan at 8.25% under a federal consolidation loan the borrower can choose to repay the loan under the standard 10-year payback or stretch the term up to 20 years. In the first instance, the minimum monthly payment would be $491, while in the latter it would drop to $222. This represents a savings of $3,228 per year. In some cases, borrowers can extend their payments up to 30 years.
Lower monthly payments on student loans mean that graduates can allocate funds to other expenses, including car payments, rent and other household necessities.
Another plus of student loan consolidation is that the service is usually free to the borrower. Also, it simplifies the repayment process. According to Creel, there are no fees associated with NextStudent’s consolidation product and the process minimizes the number of lenders the borrower must encounter, eliminating different payment schedules and paperwork.
Student Loan Debt Got You Down? — Loan consolidation can help.