Loan Consolidation
What is loan consolidation ?
It is a combination of all your outstanding federal student loans into a single new loan. Upon signing the consolidation loan application, new terms and conditions will apply.
So how do you know if consolidation is right for you ?
Research on the various loan provisions, suffice to say including interest subsidy, deferment, forbearance, forgiveness and cancellation before taking the plunge. For loan Consolidation, the repayment comes in the form of either standard, graduated or income-sensitive repayment plan.
Both the Federal Family Education Loan Program and the Federal Direct Loan Program provide Loan consolidation. In order to apply, you must satisfy the following criteria :
- Be in the grace period (for Direct loans, you can still be in school) or already be in repayment
- Have no other consolidation application pending or in process with another lender
- Be a defaulted borrower who will re-enter repayment through consolidation
Capitalization
What is capitalization ?
Capitalization occurs when your lender or loan servicer adds the amount of unpaid, accrued interest on your student loan to your loan balance. Once this interest has been capitalized, interest begins to accrue on that new, higher loan balance. To figure out when your unpaid interest will be capitalized, contact your lender or servicer.
Let’s illustrate how capitalization work .
Assumption :-
Lets use the example of 2 students, John and Jim. Here it is assumed that they both borrow the grade level maximum of unsubsidized Stafford Loans allowed each year for four years; an 8.25% interest rate; and a standard (120 month) repayment term.
Lets say both John and Jim take up a student loan for the amount of $17,125.
John decided to pay his accruing interest on his student loan while in school, which means paying this amount of $3,211,while, Jim elected to allow his lender to capitalize his interest after he graduates and enters repayment.
Thus, the Principal balance when repayment begins for John is $17,125 and Jim amount starts at $20,336.
Monthly payments for John is $210 while that of Jim is $250.
And the Interest paid during repayment for John works out to $8,080 and Jim is at $12,807. Thus the total interest payment for John is $11,292 ($8,080 + $3,211), and Jim paid $12,807, thereby giving John a $1,515 in savings.
Repayment Incentives
Lender normally offer incentives to borrowers to encourage prompt payment, so it is worthwhile to check with your lender to see what kind of options is available. Such incentives can and do come in the form of reduction in interest rate if the monthly payments are deducted directly from your personal checking account. Savings can be quite substantial, in the region of hundreds if not thousands of dollars.
So in conclusion, give some thoughts about establishing good credit and repaying student loans on time as it will definitely reward you with lower risk assessment and favourable low interest rates by the lender in the long term.
