Consolidation is often the best way to alleviate financial pressure. It is the same for student debts, where private and federal student loan consolidation programs help clear debts constructively. Just be wary of the differences.
Loan consolidation is widely recognized as an affordable and effective way of alleviating the financial pressures students find themselves in. Not everyone expects students who have had their college careers financed by federal loans to be in such dire straits. But for those students, there are federal student loan consolidation programs available.
Only those who have taken out federal loans can qualify for these programs. If they have also taken out private loans, these loans are rarely covered jointly by the same consolidation program and require a private consolidation loan. Regardless, clearing college debt is definitely made more affordable.
It would be unwise to dismiss the extent to which student loans can place a student in debt. Over the three or four years that a student is at college, the accumulated figure can be as large as $50,000. So, finding an effective strategy to clear them is a key move.
Difference Between Federal and Private Loans
So, why are these loans considered so different? Why can a federal student loan consolidation program not include personal loans too? The reason is the terms of these loans are very different – not least the fact that federal loans already come at more affordable terms.
Since the federal government either issues or subsidizes these loans, the risk is much lower. Therefore, interest rates can be much lower than those charged by private lenders. Different states may offer slightly different terms, depending on a range of factors. Normally, the clearing college debts starts on graduation day.
Privately funded student loans are provided by banks and commercial lenders, and come at higher interest rates. Often, they too offer a period of grace until after graduation, but the accumulation of interest over that period means high repayment sums are necessary once it comes to an end.
Consolidation Programs Do Not Mix
The specific differences between private and federal loans means the benefits provided by a consolidation program can greatly vary too. But crucially, because federal terms are already designed to save money, including them in a private program is not likely to result in any great advantage. A federal student loan consolidation program is needed to accomplish that.
At best, a private loan may be altered to match the terms of the federal loan, so a federal loan is not improved. However, clearing college debts through a federal program means the repayments can be lowered sufficiently to make a difference, and ease the financial pressure the student is under.
A good example is the ability to delay repayments on a student loan until after graduation, but without an accumulation of interest. So, the slate is clean until graduation. A private lender, on the other hand, may charge $20 per month in interest for 5 years, meaning $1,200 in interest is due when graduation arrives.
Typical Federal Consolidation Terms
How can a federal student loan consolidation program work so well? It has everything to do with the terms that are offered. Often, it is a private lender specializing in federal loans to students that finances the consolidation loan, but with federal subsidization the interest rate falls dramatically.
Basically, the original federal loans are bought out, with the new loan coming at a much longer terms to ensure the repayment sum is as low as it can possibly be. The maximum period is 30 years, and a fixed interest rate means clearing college debts can fit perfectly into a tight budget.
This structure means that major savings are made each month, with payment of $300 falling to perhaps $175. However, over the loan term the amount of interest paid is much more. The key difference is that student loans are paid off, and consolidation repayments are always affordable.
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