One common illusion students have is that consolidation reduces student debt. Well, the truth of the matter is it does NOT reduce debt at all. In fact, it only makes matters worse by increasing your total loan volume in the end.
The primary purpose of consolidation is to extend out the loan term and reduce the monthly burden in that manner. It’s the same principle as having a 3yr / 36 month car loan vs. a 5yr / 60 month. The person with the 5 year loan term will have a lower monthly payment but will be paying back more money in interest over the life of the loan.
The reason a student should consider consolidation, however, is if they can either not afford their current monthly payment on their loan(s) or are aware that the variable interest rate on their federal loan(s) will be increasing. If the interest rate is going up it would then benefit you to lock in your current rate.
Keep in mind that variable Stafford loan rates change each July and are pegged at certain margins above the 91-day T-bill in late May. In the past Stafford loans were awarded at variable rates, but moving forward for the foreseeable future all federal loans will hold fixed rates.
No comments:
Post a Comment