Share Your Thoughts: Consolidating Student Loans
From time to time, I receive questions from blog readers. I know that, like the “Ask the Audience” lifeline on the show Who Wants to be a Millionaire, the collective wisdom of many can often be very valuable. To that end, I have decided to periodically put these questions I receive to you, the reader. Below is one of the questions I've received recently.
Love reading your posts; they are very helpful to me on my quest to be financially free of debt. I am 23, and I graduated college two years ago. With graduation came student loan repayments. I was wondering if you know of any program or information on repaying student loans.
My issue is that I have federal and private loans that all need to be paid now, and I don't have the income to pay 3-4 separate payments a month on student loans. I was wondering if there is a way I can consolidate all my loans into one payment a month. I know I can do this for federal loans, but what about private loans, like with Sallie Mae? Any info you can provide me on this would be greatly appreciated.
First, a few of my thoughts: I know C. says that he is aware borrowers can consolidate their federal loans into one payment. For others who didn’t know this, the site to get started with this process is Direct Consolidation Loans, a site by FSA. If you have federal student loans, you can benefit by consolidating them because your overall interest rate is lower. If your loans were originated after July 1, 2006, you probably won’t save much by consolidating, however, because interest rates on federal student loans made after that point are fixed. According to federal regulations, your consolidated loan will have an interest rate "based on the weighted average of the interest rates on the loans being consolidated, rounded to the nearest higher one-eighth of one percent." It is also worth noting that you will need to meet certain requirements in order to consolidate these loans, including a combined balance of more than $10,000 on your loans.
C. mentions consolidating private loans with companies like Sallie Mae. For those of you who don’t know, Sallie Mae originates the most federally insured student loans in the country, meaning that the federal government does not fund the loans (instead, Sallie Mae is a publicly traded company), but it does insure them. Unfortunately, in 2008 Sallie Mae suspended its loan consolidation programs, stating that “severe legislative cuts made by Congress made federal loan consolidation uneconomical.”
If C. is really unable to pay all of his student loans, it might be wise to explore income-based repayment plans or the Public Service Loan Forgiveness Plan (both only available with federal student loans). If all of his loans are private, he should look into extended repayment or graduated repayment options, although it is important to note that while both options could lower monthly payments, they could significantly increase the total amount a borrower has to repay. I would suggest looking into these alternative repayment plans only if he has exhausted all other means of reducing monthly expenses.
Now I’ll turn it over to you: What advice do you have for C. to lower his student loan payments? Share your thoughts!