Today’s graduates face an uphill battle to pay down and eventually pay off their student loans. According to our statistics, outstanding student loan debt has now reached $1.45 trillion, with the average student loan burden upon graduation is now over $27,000.
In many cases, students aren’t merely grappling with one lender and one monthly payment; many graduates had to resort to getting multiple student loans from many lenders during the course of their education.
Why can the prospect of graduation be such a financial shock?
Many student loans offer repayment deferment options during school which means students only face the full force of their monthly debt repayment six months after graduation. Although helpful during school, graduates are often unprepared to face full payments every month. Considering the average monthly payment for borrowers aged 20 to 30 is $351, this can be a very challenging task.
So how can borrowers reduce the financial burden their student loans put on them? One answer is student loan consolidation.
How Federal Loan Consolidation Works
What is federal loan consolidation? It’s a program offered through the federal financial student aid program that allows borrowers to combine multiple federal student loans into one, easier-to-manage loan.
The interest rate on the new loan is a weighted average of the interest rates on the previous loans rounded up to the nearest eighth of a percentage.
When consolidating their federal student loans, borrowers have the option to choose a new repayment term. Most borrowers typically extend the term of their loans – in some cases to upwards of 30 years.
Under the new terms, graduates reduce the monthly loan repayment burden. This takes some of the pressure off immediately upon graduation but will increase the total cost of the loan overtime.
Refinancing and Consolidating With a Private Lender
If you are also interested in saving money on your student loans while also consolidating them, refinancing with a private lender may be for you. Before we go into detail about refinancing, keep in mind that it will turn federal student loans into private loans – causing you to lose eligibility for federal student loan benefits and repayment plans like student loan forgiveness, forbearance and deferment protections, and income-driven repayment plans.
If none of those are important to you, then refinancing through a private lender may help you save money through a reduced interest rate while also allowing you to choose a new repayment term if you qualify.
When applying, you’ll be required to submit some information including basic personal information, education background, current student loan amounts, and income. Through a soft credit check which doesn’t affect your credit score, you’ll receive an estimate on what your new refinanced loan might look like.
After this, you can decide if refinancing makes sense for you before making a decision. If you decide to move forward and are approved, the new lender will pay off your old loan(s) and issue you a new one.
Options for Reducing Your Student Loan Payments
If refinancing/consolidating with a private lender or consolidating with the government isn’t for you, federal student loans also offer a few other options to help reduce the stress of your monthly payment.
Explore what repayment plans are available to you. There are extended repayment plans (which increase your repayment term), graduated repayment plans (which slowly increases your monthly payment every few years for the lifespan of the loan), and income-driven repayment plans (which takes your income and family size into consideration to determine the size of your payment).
Carefully compare the pros and cons of each repayment plan to determine which works best for your financial situation.
Author: Jeff Gitlen
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