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Student loan consolidation has advantages, but not for all.
It seemed like Monopoly money at it. Emily, at New York University senior, who prefers not to use her name, has made thousands of dollars of student loan debt without giving it much thought – until now. Just weeks of graduation, she applied for paralegal work in the hard market and suddenly coming face to face with the fact that in six months, it will begin making monthly payments of about $ 250 on your $ 20,000 debt.
“All I had to do was sign for Sallie Mae Web-site to observe a few boxes and wait for money to be paid,” she said. “The thought of repaying it never hits you until the exception is at hand.
If only the problem of repayment of loans the student has been as easy as taking them. Instead, a complex process, with which millions of college graduates should be addressed. Two out of every three students walk from the graduation stage with some form of student debt, according to a 2008 College Board study. Average: $ 22,700 per graduate – and it does not count student-loan debt of entering college students who never get a degree.
In three of seven federal loans and private, Emily is in a situation familiar to the elderly and recent college graduates from across the country. Like her, many consider consolidating their loans as a way of reducing their monthly payments and simplify their finances. The theory is that any tension in the repayment of loans and refinance them at lower interest rates, a borrower can reduce monthly payments. Unfortunately, this is not a strategy that works for everyone.
One of the problems for people like Emily that federal loans can not be combined with private sector. Another is that since July 2006, all federal student loans has started carrying a fixed interest rate. Until then, federal loans were issued with variable rates, according to their consolidation, borrowers can often lock in that rate was lower than they are paying on each loan individually.
At present there is no financial benefit for the consolidation of federal loans do not have a single monthly payment, and access to alternative payment plans, said Mark Kantrowitz, publisher of FinAid, a Web site that tracks college financial aid industry.
If you can afford that payment on your loans, Kantrowitz said, consolidation is not going to help you. If, on the other hand, you are having trouble making your monthly payments or think you may in the future, consolidation may provide some options.
Remember, however, that while almost all the payment plans to reduce monthly payments, but also add several thousand dollars in interest costs by stretching the life of the loan. If, for example, you stretch a standard 10-year-old student loan up to 20 years, you can reduce your monthly payments by 34%, but ultimately the payment of double the amount the interest for the time, Kantrowitz said.
If some or all of their loans were written prior to July 2006 – say, in your first year in college when a graduate this year – wait until after July 1, 2009, to strengthen, Kantrowitz suggests. He predicts interest rates will fall to a historic low level of 2.6% from its current 4.2%. The problem with acting too fast? Borrowers who already consolidated are not allowed to do so again on a new course.
Starting in July of this year, borrowers who have federal student loans can choose a new income-based repayment plan. This can be a smart option for those fields with relatively low wages, and public service. Under the plan, which is open to any federal loans, monthly payments of a percentage of the borrower’s income.
The indicator is defined as the difference between a person’s adjusted gross income (the amount for which you are subject to payment of federal taxes) and 150% of the federal poverty level (which goes up to $ 16,245 for an unmarried person without children, based on current rates.)
For an unmarried individual with no children and adjusted gross income of $ 40,000, monthly payments would be limited to the amount of $ 365. The growth of wages would mean an increase in the monthly payment. If fully drawn have not yet paid off after 25 years of these payments, the balance is forgiven.
Students who have already begun to repay loans may choose to enter on the basis of maturity, but is an important reservation: it would restart the clock and give credit for the new period an additional 25 years.
Emily, a senior at NYU, and many students had to turn to private loans that the federal program will not be. Private loans, unlike the federal, bear a variable interest rate. The consolidation of these rules may save money for students.
In the case where a borrower has loans, he had a limited credit history, like most students, three or four years, making regular payments on your credit card or an impressive history of employment may increase a credit score of 100 points or more. This, in turn, could convince the lender to reduce interest charges as a result of loan consolidation.
“Borrowers can obtain a lower rate now, and their rate can not jump as high in the future”, Kantrowitz said.
Another potential advantage of the consolidation personal loan is to remove one of the signatory, which could save a parent or relative with a potential liability. This is possible after 24 to 48 months after making regular payments.
If you would like to consolidate personal student loans, you should apply to any Chase, NextStudent, student loan network, or Wells Fargo, Kantrowitz suggests. All offer several different terms, and all have limitations on the amount of total debt can be consolidated.
Important questions to ask consolidator whether the prosecution of charges, if there is a prepayment penalty, that the maximum rate of interest is the fact that living in a loan will be. Please read carefully the conditions and, if possible, have a friend or relative to do the same. If you do not understand, ask your lender as long as you do not get a straight answer. In the end, you conclude a contract, which may last as long as 30 years.
Avoid any lender who charges prepaid. You want an opportunity to repay the loan early without punished for it.
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