LOAN CONSOLIDATION OF STUDENT LOANS

2007-03-08 10:33:40

( Financial )



The Federal government permits college students to take out loan for college education expenses from eligible lending institutions. Studentloans are low interest educational loans provided by the federal government through eligible lending institutions. Some colleges directly facilitate approval of these loans. It offers favorable loan terms. Repayment can start after the student graduates from college. The federal government serves as guarantor for the loan and agrees to assume payments when student defaults. It can assume the payment of interest while the student is still in college.

Student loans are either subsidized or unsubsidized. Subsidized student loans charge either zero interest rate or below the current market rate. Unsubsidized student loans charge full interest rate but still lower compared to other loans. Multiple student loans are allowed.

Borrowers have the option to apply for a federal student loan consolidation of student loans that reached burdensome level. Loan consolidation involved renegotiation of several student loans into a single loan with new repayment terms such as interest rate, amortization and repayment period.

Interest Rate Calculation

The interest rate is fixed for the period the loan will be repaid. A weighted average of the interest rates of all the loans for consolidation is computed. It is then rounded up to the one-eight percent of the calculated interest rate.

Amortization Options

Loan consolidation provides three options on amortization payment namely (1) uniform amortization, (2) graduated amortization and (2) income contingent amortization.

Uniform Amortization

Amount of principal and interest repayments is the same throughout the repayment period. This straight line repayment approach can repay the entire loan for a shorter period of repayment.

Graduated Amortization

Amortization starts at a smaller amount and gradually increases over the period of repayments. Some graduated repayment scheme allows for interest repayment only at the start and gradually includes the principal payment.

Income Contingent Amortization

The income contingent amortization option can only be availed from the U.S. Department of Education Direct Federal Loan Consolidation Program. Monthly amortization is computed based on the level of income of the borrower. Repayment term is 25 years. The long repayment period entails higher amount of interest payment. The government pays for the balance of the loan if there is any at the end of 25 years. A tax liability is charged to the borrower for the amount assumed by the government. Thus, the income contingent amortization option is recommended as a last resort to the borrower considering loan consolidation.


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