STUDENT LOAN CONSOLIDATIONS: THE COSTS BEHIND THE BENEFITS

2007-03-08 10:33:40

( Financial )



Student loan consolidations are enticing during periods of financial crisis. It simplifies your loan repayment by combining all your other loans into a single loan. It lowers the amount of your monthly repayments as a result of the extension of your repayment period. The new loan will also bear a fixed interest rate. These factors illustrate student loan consolidations as beneficial to borrowers during periods of financial crisis. Deeper analysis of these benefits shows the real impact of consolidation to borrower’s long term financial situation.

The Cost of Combining Multiple Loans

Student loan consolidations require taking out a new loan to pay off your outstanding loans. You will be paying a single monthly repayment for these loans. The new loan incurs a new set of application fees, documentation and processing charges. In the end you are actually incurring higher costs when you add up the cost of consolidation with your previous loans. The application and processing cost of student loan consolidation, in particular, is higher compared to the other regular loans.

College loan consolidation sometimes requires you to put up collateral and an additional guarantor for the loan. You risk losing the assets you and your parents put up as collateral when you default on your repayments.

The Cost of Extending the Repayment Period

Extension of loan repayment period results to lower amount of monthly repayments. It also means paying more cash on the loan’s interest. The maximum years of extended repayment period for student loan consolidations are 25 years. You could save the excess money you have paid on loan interest if you have retained the shorter repayment period prior to consolidation.

The Cost of Fixed Interest Rate

Student loan consolidations impose fixed interest rate which cost you to forego other opportunities related to your student loan. You are not eligible to avail of discount offered by some student loan programs when you consolidate. These discounts could save you a lot of money in interest payments and to some extent on principal repayments. Also, you forego the opportunity to avail of lower interest payments when variable interest rates drop in the market.


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