Know the Factors in Consolidating Student Loans Debt

Jan 10, 2011
Peter Owen

Student Loan Consolidation Programs greatly reduce monthly payments. There are 4 factors that must be analyzed when considering College Loan Consolitation.

The Explosion of Student College Loans

The number of student loans and the amount of student loans, both Federally Insured and private, has been exploding recent years. The reasons for this are well known:

The economy – parents are either out of work or not getting the raises they had in the past. They simply cannot afford to pay the entire college education. The children are told that they will either have to help pay for the college costs or pay for the entire college tuition themselves.
High school students are consistently told that they must go to college at all costs in order to secure a good career job. They have no option but to apply for student loans.
High school graduates will apply to the best colleges they can, which in turn usually means higher cost. If a college loan can get such students into a better college, teenagers have no problem taking on student loans on the assumption that they will get a better job and thus are able to pay off the loans in the future. Also, they will not be forced to go out and find a low paying job rather than attend college.
Teenagers just do not comprehend the financial impact such loans will have on them for many years into the future. Teenagers do not think that far out. These loans will allow the student to go to college and that is all that is important to a teenage student.

College graduates may amass several hundred thousand dollars worth of debt, and they may even increase that amount by applying to graduate school. In recent years, many college graduates go on to graduate school immediately since the job market is not good and they cannot find a good enough paying job. When they finally do enter the workforce, the students are overwhelmed by the amount of required monthly debt payments while at the same time trying to live on their own or get married.

The loans may have come from various sources. Most have a number of the federally insured loans such as:

•Federal Stafford Loans

•Federal Direct Loans

•Federal Perkins Loans

•Federal Supplemental Loans for Students (SLS)

•Federally Insured Student Loans (FISL)

•National Direct Student Loans (NDSL)

•Federal Parent Loans for Undergraduate Students (PLUS)

•Loans for Disadvantaged Students (LDS)

•Auxiliary Loan to Assist Students (ALAS)

•Health Education Assistance Loan (HEAL)

They may also have privately funded loans outstanding from any number of banks or financial institutions.

The young adults, now in their early to mid 20s, get a dose of reality in dealing with their personal finances. They must now start to repay the loans, rent an apartment, buy a car, eat, etc. They find that the debt load is absolutely staggering and takes a large chunk of their monthly salary. It is quite natural that such people will seek out any avenue in an attempt to reduce their debt load and lower their monthly payments.

This is where these young adults encounter the concept of student debt consolidation loans. They will be inundated with letters, emails, or phone calls advertising how to consolidate their student loans and lower their monthly payments.

Many articles have been written on the pros and cons of loan consolidation, and the possible college loan consolidation scams that exist in the real world. Still, it is very beneficial to explore consolidating your student loans.

In reviewing any loan consolidation program, or any debt repayment program, there are four, and only four factors, which determine the ultimate effect or amount of a student loan consolidation program.

All debt consists of the following factors:

· Principal amount – this is the amount borrowed

· Interest – the amount by which the unpaid balance will increase yearly

· Length of time – the period over which the loan will be repaid until there is a zero balance

· Periodic payment – the amount you pay each month, which may or may not be fixed. Also any lump-sum payments that may be required in the future, such as “balloon” payments.

All student consolidation loans are a rearrangement of some of these four factors. The most common program that you see advertised will show a reduced interest rate, lower monthly payments, but will extend the life of the loan for a number of years. This may very well be a good program for the young adult in that it allows him to pay off an affordable amount over a long period of time. While this will create a larger amount of interest being paid over the course of the loan due to the longer time period, the person’s salary increases in the future should, in theory, allow him to live and survive, and eventually pay off the loan.

There are many programs which may not be appropriate when contemplating consolidating student loans. One such gimmick advertises a very low interest rate, a longer period of time, and a much lower monthly payments. However, the Loan Consolidator accomplishes this by requiring a large lump sum payment, known as a “balloon” payment, to be made at the end of the loan. Essentially, it is a deferral into the future of amounts that would be paid each month under a normal fixed loan. This unpaid sum goes on for years accumulating outstanding interest charges. In the end, this type of loan consolidation can be extremely expensive. Other programs may use a combination of variable interest rates which can rise drastically in the future, and periodic “balloon” payments.

In reviewing college loan consolidation programs, one must project the ultimate total amount that will be paid over the entire loan period, and then analyze the individual four factors to understand exactly the financial burden that is being deferred into the future.

The important point is that you must focus on more than just the lower monthly payment that is being offered under your student loan consolidation program. If you do not understand the impact of the four factors on student debt consolidation loans, seek out qualified help. Such help should not come from the person who is trying to sell the consolidation program. An independent financial advisor will be able to help you in this endeavor and ultimately save you thousands of dollars.

It is also very important that loan programs be reviewed prior to entering college to project the amount of debt that will need to be paid off after college. This could very well make you consider attending a less expensive college, or possibly a Community College for the first two years to reduce overall college costs.