Whether you are applying for student loans or are simply looking for better ways to pay off your current student loans, there are many variables to think about as well as different kinds of loans that are available to you.
Different types of Student Loans
Federal Student Loans, extended directly to the Student — There are no payments due on this type of loan while the student is enrolled in school in at least a “part time” capacity. In the event the student falls below this status, the account will enter into a 6-month grace period in which no payments will become due until after that period is over. If the student re-enrolls in school during this 6-month grace period the loan will be deferred. However, should the student drop out of “part time” status again, the 6-month grace period is no longer available. Amounts for loans are typically very limited.
Federal Student Loans, extended directly to Parents — These types of loans carry a substantially higher limit than federal loans submitted to students, and payments are due immediately as opposed to after the student is out of school.
Private Student Loans extended to Students and Parents—These loans allow higher limits with no payment due until after the student graduates. However, there is interest associated with this loan that begins to accrue immediately. These loans may be used to cover any education related expense and may also be used to supplement federal loans that did not sufficiently cover all education expenses.
Consolidating Student Loans
By consolidating your student loans, you have the potential to significantly reduce your monthly payment. You can lock in a low fixed interest rate, and make one payment for all of the student loans that were extended to you. However, there are some important factors to remember if you are considering consolidating your student loans. When considering consolidation, it is recommended that you consolidate your federal loan before your private loan so as to avoid losing any benefits associated with your federal student loan.
In order to consolidate your federal student loans, the consolidation must be done during your grace period, during periods of repayment, forbearance, or deferment. Loans issued to parents may be consolidated at any time after the monies have been disbursed, regardless of the child's enrollment status. Also, in order for a loan to be eligible for consolidation it must total over $5,000.00.
Because student loans are guaranteed by the U.S. Government, the consolidation of these loans is a little different. When a student loan is consolidated, the existing loan is purchased and closed by the loan consolidation company, or by the Department of Education depending on what type of loan the borrower holds. Student loan consolidation does not involve any fees for the borrower in the way that a private sector debt consolidation would. However, there are private companies that do profit from consolidating student loans by receiving subsidies from the federal government.
Student loans are never fixed and fluctuate between 4.7% to a maximum of 9%, depending on what type of student loan the borrower holds. Students are allowed to consolidate once with a private lender, and every time thereafter only with the Department of Education. When a student reconsolidates, what they effectively do is lock in a fixed interest rate that does not fluctuate for the life of the loan. The interest rate is determined by whatever the current interest rate is, making this a desirable option when interest rates are low.
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