Americans are increasingly finding it harder to become and remain debt free. In many households, credit cards have replaced savings for emergency expenses. Auto loan delinquencies are at historic highs. In many urban areas, renting a basic apartment can wreak havoc on the most carefully balanced budget. But no group has been hit worse by America’s high debt levels than student loan borrowers.
As of the start of 2018, student loan debt topped $1.4 trillion amongst 44 million professional student borrowers. As such large portions of their incomes must go toward servicing student-loan debt, borrowers often have little savings to live on or continue their education. This results in increased credit-card balances and higher borrowing levels for vehicles and other big-ticket items. Also, many of the jobs students went to school for are located in urban areas where the cost of living seems a fortune compared to just a decade ago.
Now more than ever, student loan borrowers are looking for ways to manage and cut their student-loan debt. By far, consolidation stands as the most effective method. Consolidation allows students to have just one monthly payment, often lowers interest rates, and provides longer loan terms. However, whether consolidation works depends on the type of student loan and when the borrower applies for consolidation.
Federal student loan consolidation
Federal student-loan consolidation offers many benefits, even if the interest rate remains the same, as Debt.org explains, consolidated federal loans provide a lower rate in some cases and offer the benefit of stretching payments over longer terms, a tremendous help in reducing monthly payments for cash-strapped career starters. It also allows borrowers to drop co-signers from their loans. Further, consolidation locks in a low fixed rate, protecting the borrower from market fluctuations.
Professional Students also qualify regardless of age or credit status. Borrowers can consolidate even if they are behind on payments or have suffered some other financial hardship. A number of income-based repayment options allow borrowers to pay based on what they can afford, a necessity for any student-loan borrower not making the income they hoped.
Private student loan consolidation
Private loans are a very different animal when it comes to consolidation. Credit scores matter. Student borrowers who have fallen on hard financial times face barriers in qualifying; however, those who qualify are often offered variable interest rates that are much more attractive than the fixed rates of federal consolidation.
Avoid the interest-rate trap
Stretching the term and signing up for income-based repayment helps borrowers who cannot fit larger payments into their budgets but often results in more interest payments over time. Interest that the borrower does not pay is recapitalized into the loan, meaning that interest is charged on interest. Also, longer terms mean a much larger portion of payments goes to interest. This can add up to tens of thousands in additional interest over a long term on a high balance.
Borrowers should always carefully consider the level of interest they accrue. If full repayment is possible in a shorter time, borrowers have the option of saving on interest by paying off their consolidated loans early.