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How Does Debt Consolidation Work Pros And Cons – Consolidating your student loans can save you time and money. Learn how to consolidate, the pros and cons of each path.
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How Does Debt Consolidation Work Pros And Cons
Together, they borrowed $1.5 trillion to get their degree, and it wasn’t easy to pay it back. About one in 10 default on their student loans, and while the average time it takes to pay off depends on the amount owed, it’s safe to say it’s likely to take at least 10 years, and could be as long as 30 years.
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Class of 2019 members who took out student loans owed an average of $31,172, and their payments are just under $400 a month. This is a significant and unwanted graduation gift, so it’s important to know how to minimize the damage.
If all the money you borrowed was federal loans, you may find easier repayment options by applying for a direct consolidation loan.
If some or all of your student loans were made by private lenders, you will need to use a refinancing program to achieve similar results.
Consolidation is a way to make paying off your student loans more manageable and possibly less expensive. You consolidate all your student loans, take out one big consolidation loan and use it to pay off all the others. You are left with one payment to one creditor each month.
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A typical student borrower receives money from federal loan programs each semester in school. They often come from different lenders, so it’s not unusual to owe money to 8-10 separate lenders by the time you graduate. If you continue to borrow for graduate school, add 4-6 more lenders.
Each of these student loans has its own repayment date, interest rate, and payment amount. Keeping up with such a schedule is difficult, and it’s part of the reason why many people don’t keep their commitments. That’s why student loan consolidation is such an attractive solution.
Federal loans can be consolidated in the Direct Consolidation Loan program. You consolidate all of your federal student loans into one fixed-rate loan. This rate is arrived at by taking the average of the interest rates on all federal loans and rounding the rate to the nearest one-eighth of a percent.
While this method won’t lower the interest you pay on your federal loans, it will keep all repayment and forgiveness options open. Some lenders allow you to lower your interest rate by making outright payments or by qualifying for a reduction by making timely payments over a long period of time.
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Student loan refinancing is similar to a Direct Consolidation Loan program in that you consolidate all of your student loans into one loan and make a single monthly payment, but there are important differences that you should be aware of before making your decision.
Refinancing, sometimes called private student loan consolidation, is primarily for private loans and can only be done through private banks, credit unions, or online lenders. If you borrowed from both federal and private programs and want to consolidate the entire lot, you can only do so through a private lender.
The main difference between a refinance and a straight loan consolidation is that with a refinance, you negotiate a fixed or variable interest rate that must be lower than what you would have paid for each loan individually. Lenders consider your credit score and whether you have a co-signer when determining your interest rate.
However, if federal loans are part of your refinance, you lose the repayment options and forgiveness programs they offer, including deferment and forbearance. The last two points can be crucial if you have financial difficulties while repaying your loans.
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The average college graduate has nearly $8,000 in credit card balance. Let us help you with your credit card so you can budget more money for your student loan payments.
There are many good reasons to consolidate through a direct loan consolidation program, not the least of which is that it allows you to survive on one of the income-based plans such as REPAYE (Repay As You Earn), PAYE (Pay As You Earn), IBR (Repayment income based) and ICR (income dependent repayment).
There are two sides to every story, and here’s another side to consider before jumping into the Direct Loan Consolidation Program:
If you’ve missed payments because you’re struggling to keep up with multiple credit companies and multiple due dates, consolidating or refinancing is the right choice. Making one payment each month instead of many makes life easier.
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You can go through the Direct Loan Consolidation program because it allows you to keep the door open to income-based repayment options, resulting in lower monthly payments.
However, it’s important to know that if your payments are part of qualifying for any forgiveness program, the clock restarts when you consolidate your s. For example, if you’ve made three years of qualifying payments for public loan forgiveness and then consolidate your loans, you’ll lose three years of qualifying payments and the clock will start over.
The big problem for most borrowers is whether they can afford the monthly payment? That’s why consolidation and refinancing are remedies: giving you a payment that doesn’t break your budget every month.
However, if you’re making enough money right now and are very committed to paying off your loan, the fastest and most effective way is to use a standard repayment plan and do it in 10 years…or less!
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Max Fay has been writing about personal finance for the past five years. His expertise includes student loans, credit cards and mortgages. Max inherited a genetic predisposition to be modest with his money and liberal with financial advice. It was published in every major newspaper in Florida, making its way through Florida State University. He can be reached at [email protected] .
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Debt checking is considered one of the best ways to overcome debt. It’s safe, structured and designed to help you achieve a debt-free lifestyle. However, there are a few disadvantages (and many advantages) that you need to be aware of.
This blog will look at the various disadvantages of debt revision so that you can make an informed choice about whether the process is right for you.
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Debt reviews, also commonly known as debt counselling, were introduced to South Africans in 2007 as part of the National Lending Act. This is a debt rehabilitation program available to over-indebted consumers.
Financial assistance is offered to over-indebted South Africans in the form of debt counseling and the implementation of a hyper-personalised, structured debt settlement plan that helps registered members eliminate their debts.
If you want to know more about debt checking, read our post What is a debt check? South Africa’s debt solution.
As soon as something sounds too good to be true, we naturally start to wonder about the downsides.
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To make it easier, we have compiled a list of all the disadvantages of a debt check. Here:
Now let’s explain what each “disadvantage” means (note that some of these points were created as advantages).
After your debt is legitimately checked, all credit bureaus will send out a notice to “freeze” your access to new credit.
Simply put, this means that you won’t be able to get more debt while on debt review (see this post for more on debt review and loans).
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It doesn’t last forever and you will be able to access credit again as soon as you complete the debt review process and receive a debt discharge certificate from your debt counselor.
The great thing about a credit freeze is that it helps you start over. This works in your favor to speed up the debt review process, ensuring that you don’t drag out the process by continually building up more debt.
As mentioned earlier, you are protected from lawsuits and asset forfeiture during debt review. However, if a lawsuit has already been filed against you, there is a risk that this debt will not be included in your plan.
To prevent such a difficult situation, it is best to seek debt counseling (debt review) as soon as you start falling behind on your debt payments.
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When you apply for debt counselling, your ‘debt’ is checked to see if you meet the necessary criteria to qualify for a debt review.
A key qualifying factor is that you must have a steady monthly income