How to Consolidate Student Loans?
[5 min read] Curious about how you can consolidate your Student Loans? Read this Qilo News article and reveal the best strategies to Consolidating Student Loans!
One of the largest financial burdens on the rising generations is the cost of an education.
No matter where you stand in the debate, none of that changes the fact that student loans are a serious problem and effective strategies for tackling them are in high demand. But how do you separate what works from what doesn’t? It isn’t easy.
Why is that? Because most students have situations that require specific remedies and may have mitigating circumstances that make certain repayment strategies better than others.
Rather than outline a comprehensive strategy for student loan repayment, or a definitive step-by-step guide for student loan consolidation, we’ve broken it down into ten things you need to go through when you’re trying to consolidate your student loans.
This is a good exercise for you no matter where you are in the process - mentally or financially. It will help you figure out what is the best strategy for you as well as give you a handle on what your current financial situation is with regard to your loans.
Here are ten things to consider when thinking about consolidating your student loans:
- Figure Out Your Loan Balances
The first step in any debt repayment process is figuring out how much you owe. This is actually a two-part process but we’ll start with the balance because that’s the easiest to comprehend in the here and now. The bigger the number, the more you owe is a concept anyone can grasp. List your debts from smallest to largest or vice versa but have some kind of coherent ladder to prepare you for the next step in the process. Psychologically speaking, this is also one of the hardest parts of process. The exact reason for this differs from person to person but, in a nutshell, facing our debts can often be a scary thing. It not only invokes dread, but also hopelessness. That’s because many people feel like debt is a mountain that will never be overcome and simply gets larger with time. Starting with a picture of the mountain does give you some idea of the scale of the task before you, but it should also help you quantify it in real terms which makes it natural, manageable, and, most of all, one more thing on your to-do list.
- Rank Your Loans in Terms of Highest Interest Rate to Lowest Interest Rate
After you have ranked your loans in terms of lowest to highest balance (or the other way around), now you want to assign the interest rate each holds. You can even generate a separate list where you rank your loans from lowest to highest interest rates. What we’re looking for here are balances and interest rates in a global overview. We want to have a quick reference to look at as we consider our financing options.
- Make Sure a Payment Strategy Isn’t a Better Option
One of your first financing options, which doesn’t involve a consolidation at all, is to choose a repayment strategy that focuses on either the highest/lowest balance or the highest/lowest interest rates. Called the debt snowball, this strategy focuses on loans with the lowest balances in your repayment process and, as you pay each one-off, you move along to the next highest balance in the chain. Of course, you perform minimum payment or servicing payments on the other loans during this period. Another strategy is called the debt avalanche. This involves targetting the loans with the highest interest rates first regardless of their balance. Depending on how quickly you can execute either of these strategies, it might make more sense to do this rather than consolidate your loans. We’ll explain why.
- Determine What Type of Loan You Hold
There is a major difference between federally-held and privately-held student loans. In short, the protections for borrowers in times of financial distress tend to be much greater with federally-held student loans than they are with private loans. This means that deferments and pauses on payments or even new repayment plans tend to be found with federal loans. If you hold federal loans, and your consolidation loan is through a private bank, then you will lose access to many of these benefits or even the future benefit or legislation to retire your debts sooner or entirely. It isn’t that consolidation of federal loans isn’t a smart option, it all depends on a myriad of factors relating directly to your financial and employment situation.
- Look at Consolidation Options in Terms of Interest Rates
If you have determined that loan consolidation will help you meet your financial goals then you need to start shopping around for interest rates, obviously looking for the lowest you can find. There are many things that will impact this and we also have to add another wrench into the works: Tax deductions, credits, and benefits. When you look at student loan consolidation, you want to be sure to not lose any of the valuable credits you accrue because of the repayment of your loans. These tax credits and deductions can be somewhat substantial depending on your income and are the equivalent of free money you can dedicate towards repaying your loans.
- Examine Options for Deferment and Forbearance with Consolidated Loan
When you find an interest rate that you think is appealing, read through some of the fine print about the loan. You want to know what your options are - especially if things go wrong. As we outlined above, federal student loans tend to have a lot of options when it comes to repayments. You want to know what your options are with your consolidated loan before you sign on the dotted line. We know you cannot predict the future and that’s why we don’t advise that you try to anticipate some kind of future change in legislation that will pay off your loans or make it easier. The most financially prudent move you can make is to start repaying your loans, in earnest, as soon as possible.
- What Would Your Consolidated Payment Be
A lot of people focus on the payment amount, and this is not the way to begin your deliberations. But, once you’ve figured out the interest rates and the terms, start looking at what kind of payments your new consolidated loan will require. It could be a straight flat payment throughout the life of the loan or it could be one that gradually increases over time. All of this is part of the puzzle of determining which loans give you the most benefits for your time and money. You want a payment that you can manage, above all, as well as one that will not endanger other critical payments such as your car payment or mortgage.
- Make Sure Your Credit is in Good Shape
One roadblock that many people encounter when they attempt to consolidate their student loans is that they find out that their credit isn’t what it should be. While it’s not impossible to do if you have poor credit, getting a favorable interest rate on your new loan is tougher. What can you do to mitigate this? You can try strategies to improve your credit before you apply. This could include paying down or paying off other debts, such as credit cards, or even improving your payment ratio on your debts. There are a lot of strategies for raising your credit score and not all of them involve paying off balances. You’d be shocked at how much money having a certain credit score can save you and that’s why you should probably look into having an optimal credit score prior to applying for consolidation.
Once you think you’re ready, the first step towards the last step is to apply for your loan. Don’t expect this process to be easy. You could be asked to provide years of financial information on yourself and you could face an even more uphill battle if you have other major debts out there. It might seem like they are putting you through the ringer, and they are. Just be sure to stick with your plan and develop a backup plan if the final terms you are offered are not optimal. Never be afraid to walk away.
- Choose the Consolidated Loan Package with the Best Terms
Always go with the loan that has the best overall terms for you and your situation. Don’t sign on the dotted line simply because you want to get it over with and don’t want to do it anymore. Being in a rush is often one of the most expensive things any of us do that is detrimental to our financial health and that is doubly true when it comes to student loan consolidation.