Student Loans - Consolidating Student Loans

Being a student is not easy, and managing the expenses is only one part of all the difficulties involved. With skyrocketing educational costs, it is only obvious why students are seeking out to complete all or most of their education with student loan finance. Most of them need to take out a loan each year of their academic pursuits, and even take some personal loans for helping them pay their peripheral costs such as accommodation, buying books and computers, joining libraries, food, etc. All these loans seem quite easy when the educational period is still going on. But the reality begins hitting hard when the graduation time approaches… All said and done, the loans have to be paid back.

A survey conducted by the National Center for Education shows that about 50% of all American students have some or the other educational loan on their shoulders when they graduate. The average loan per student is approximately $10,000. Now, there are various educational qualifications that students will graduate with, and thus they will have different kinds of jobs with a vast range of pay scales. But even then, it is safe to assume that, on an average, students will take anywhere between 10 and 20 years in order to work out these debts. Within this period of time, they might start a family and even buy a home on a loan. That will certainly put more pressure on the payment of the educational loans. It can be said that getting into an educational loan is difficult, but getting out of it is certainly much more difficult.

So, what are the options? How can graduates manage to wrangle out of their educational loans quickly? And indeed, is there really a quick solution?

To all outward seeming, there is. Known popularly as student loan consolidation, in most cases it is helping students to work out their debts faster. Of course, with any financial facility, there are always pros and cons, and consolidated student loans have their fair share of grime too, but even then it is a solution that can work if handled in the right way.

Student Loan Consolidation – What Is It?

In extremely simple layperson terms, consolidating student loans means taking all your loans and combining them into one single loan, possibly at a lower rate of interest than the previous loans. People who help in consolidating student loans are simply called as student loan consolidators. It is their job to speak about the loans to the creditors, negotiate them for better rates, then pay the loans out to the creditor banks and direct the low interest payment to themselves.

The student loan consolidators maintain good relations with financial institutions that allow them to haggle for lower rates and more flexible repayment terms. In most cases, they get the terms they reasonably ask for. These advantages are passed on to the borrower. The loan consolidators might also take a fee of their own. It must be noted that the student will have to make the payment to the consolidators after the process is done with.

Student Loan Consolidation – The Advantages

At first glance, this seems to be a win-win situation for everyone involved. The original creditor bank wins because it gets its entire principal at once. There may not have been a doubt in the first place, but the number of people filing for bankruptcy is always on the increase. If there would have been a bankruptcy, the creditor would have ended up with the short end of the stick. So they do not mind recovering their principals on the loan back, from whosoever is ready to pay it.

The student loan consolidators win, because they get a loan sold. The student will now continue paying the loan back to the consolidators. The interest rate might have been lowered, but the tenure could be increased. So, the consolidators are actually not losing much by their magnanimity. Plus, they are working out goodwill. With each consolidated loan closed, they are rising in the student ranks and increasing their potentials for business. This is one of the rare businesses in which each sale undeniably turns out to be an advertisement for a couple of more sales.

Apparently, the student makes the best benefits out of it all. He or she does get laxer terms to make the repayment, and might, in all probability, have to pay much lesser than what was originally bargained for. Repayment of the loan suddenly seems possible to the student and his or her life takes on a new and better turn. With less monthly payments, the graduated student is able to spend on other things, and in fact, keep the mind at peace and work out a strategy for building up a career.

Speaking of keeping the mind at peace, there are many other finer points that need mention. The student will no longer have to pay to several creditors at several times of the month, but just one payment – to the loan consolidator. This actually helps the student to manage the finances in a much better manner. Also, the loan repayment seems workable each month. Gone are the dozens of ominous phone calls a month and they are replaced with a routine possible payment each month. Students who get their loans consolidated, really do begin loving their lives.

Student Loan Consolidation – The Pitfalls

But does the euphoria of getting the loans consolidated and ending up with significantly smaller payments each month last long? This is actually a tricky question. Let's just say that student loan consolidation is really not all that rosy as it appears to be on paper.

For one, consolidation is just a tilted way of arranging the loan. Though negotiations with the original creditors are genuine, many times the creditors just would not budge. In any case, the loan consolidators will spread out the payments for a long duration, and that would make the monthly payments seem quite small. This is where it actually makes no difference to students. They are paying the same amount eventually, but spread out over a long term. And the long term of repayment does correctly imply that the total interest paid will be higher.

Since the tenure is longer, there is a very strong possibility that the borrower will simply get tired on making repayment on a loan he or she had taken decades ago. It might lead to frustration too. It is not about money, but the longer repayment period just looks quite cavernous after a point of time.

Also, there is a peripheral risk associated with student loan consolidation. Since a significant amount of cash will be left with the student, there's a strong tendency of overspending. There is also the danger that the borrower might never learn the value of money, and do the classical mistake of borrowing another loan to repay the first one.