Student Loan Consolidation Program

Student loans are loans offered to students to assist in payment of the costs of professional education. These loans usually carry lower interests than other loans, and are usually issued by the government. Often they are supplemented by student grants which do not have to be repaid. In the United States, while included in the term “financial aid” Higher Education Loans differ from scholarships and grants in that they must be paid back. They come in several varieties in the United States:

Federal Student Loans made to students directly: No payments until after graduation, but amounts are quite limited

Federal Student Loans made to parents: Much higher limit, but payments start immediately

Private Student Loans made to students or parents: Higher limits and no payments until after graduation, although interest will start to accrue immediately.

No payments until after graduation, but amounts are quite limited.

Much higher limit, but payments start immediately

Higher limits and no payments until after graduation, although interest will start to accrue immediately.

College students are leaving their higher education institutions with more educational loan debt than ever before. From academic year 1994- 1995 to 1999-2000, the amount postsecondary education students borrowed through the federal student loan programs jumped from $24 billion to $33.7 billion (U.S. Department of Education 1999 and 2000a). Cumulative federal student loan debt for bachelor’s degree recipients rose 19 percent, while total debt for borrowers who received master’s and other advanced degrees more than doubled (Scherschel 2000). What has led to the increased use of student loans and personal loans? Is the rising indebtedness harming students’ futures?

While concern about rising student debt levels remains high (Scherschel 1999a and 2000), recent data reveal that much of the increased borrowing occurred due to the expansion of the loan programs rather than to growth in college costs. Further, many of the new loan recipients came from middle- and upper-income families, and most undergraduate borrowers do not appear to have been adversely affected by their added indebtedness. Some students try to think ahead and buy a house thinking that if they rent out the place they can make some money as well as when time comes, they can sell off the house for a profit whatever that may be. In order to do this, they may take out some home improvement loans

Eligibility for federal student loan consolidation
You are eligible to consolidate federal student loans when:

  • You are no longer enrolled in school (defined as being enrolled less han half time)
  • You must be in the “grace period” of the loan or must be actively repaying your loan.
  • Most consolidation companies require a minimum loan amount, $10,000 is typical.
  • About 50% of recent college graduates took out student loans, with an average borrowed around $10,000. In the last three years, rates have fallen very low. Consolidation interest rates can be much lower (under 2%), but this comes with very specific requirements – like good repayment history.

    Like any debt, student loans can influence your credit and your future decisions. Students who borrowed a substantial amount for college (more than $5000) are less likely to pursue higher education (ref. 3). In addition, student loan debt that exceeds 8% of your income can be seen negatively when your credit gets assessed for future loans.

    Two ways to reduce the debt burden are:

    1) reduce or eliminate the principal balance. Specific types of loans can sometimes be forgiven by service or other higher education – look into the specific student loan program you have.

    2) Reduce your monthly payment. Since debt burden is measured by comparing your loan payment to your income, reducing your payment helps your credit evaluation.

    How student loan consolidation directly improves your FICO score

    Because the second heaviest weighted factor (30%) is based on the amount of debt owed, reducing this amount can make a drastic impact on your credit score. Lenders also look at debt to income ratio when determining the amount of credit they will make available. Particularly for those who are just starting their careers, the lower monthly payments that result from consolidating a student loan can make a highly favorable impact on debt to income ratio.

    Borrowers who refinance their student loan often save well over 50% on monthly payments. For example, the payment on a $30,000 student loan before refinancing is approximately $350. After consolidating, the average payment is around $166, a savings of more than $2,200 per year.

    Indirectly improving your FICO score with student loan refinancing

    Young adults who are just leaving school and starting their lives, families, and careers already have the chips stacked against them when it comes to finances. The majority of people rely on credit cards to help leverage cash flow in the years following college. But credit cards, especially for those who can’t pay off the balance immediately, can become a source of angst and take a toll on your FICO score.

    By choosing to redirect the money saved from student loan consolidation, borrowers can pay down high interest credit debts. Using the above example, redirecting $2,200 per year toward paying off high interest credit card debt can add up significantly. The total over 5 years can result in $11,000 worth of high interest debt repayment.

    References: Baum, S. and D. Saunders. (1998). ” Life After Debt: Results of the National Student Loan Survey.” Journal of Student Financial Aid, 28(3) 7-23. EJ 584 134. Choy, S.P. (2000). Debt Burden After College. Washington, DC: U.S. Department of Education, National Center for Education Statistics Report Number 2000-188. College Board. (2000). Trends in College Prices. Washington, DC: The College Board. Davis, J.S. (2000). College Affordability: Overlooked Long-Term Trends and Recent 50-State Patterns. Indianapolis, IN: USA Group Foundation. U.S. Department of Education. (1999). Federal Student Loan Programs Data Book FY 94- FY96. Washington, DC: Office of Postsecondary Education, U.S. Department of Education. Wikipedia