With interest rates on existing federal student loans scheduled to rise 1.84 percentage points on July 1, college graduates have a strong incentive to consider consolidating before then. It even makes sense for students currently in school to consider doing so. The loophole that enables in-school scholars to consolidate is set to close on June 30.
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Frequently asked questions:
| It's a product that enables students with two or more loans to combine them into one, though if you have just a single loan, you can refinance it, too. When you consolidate, a lending institution pays off all your existing balances and replaces them with a new consolidated loan.
For college grads with multiple student loans that come due, keeping track of loan paperwork is a potential nightmare. Consolidating can be an attractive option, if for no other reason than to simplify your finances. |
| Q | What are the other benefits of consolidating? |
| • | You lock in a fixed interest rate and get rid of variable rate loans that, in a rising rate environment, tend to go in one direction -- up! | | • | You can extend your repayment timetable from 10 years to 20 or 30 years, depending on the size of your debt. Result: Your monthly payment shrinks. | | • | You have one student loan check to write each month instead of two or more. |
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| Q | That sounds great, but what are the drawbacks? |
| One negative that affects anyone who stretches out his or her loan term from 10 to 20 years or longer: You will end up paying more money toward interest in the long run. However, there's no prepayment penalty, so there's no reason (other than personal financial constraints, of course) why you couldn't make larger payments to pay off your principal more quickly, thereby saving some interest expense.
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