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| Reasons For Consolidating Student Debt And Locking The Rate |
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| Someone may have suggested (and you may be interested in) consolidating your student debt to reduce its weight. However, do you know in which situations it is advisable to consolidate student debt? Do you know what the benefits you can obtain by consolidating your student debt are? In this article you’ll find some answers to these questions and guidelines on student debt consolidation. |
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| Student debt can consist either on federal loans granted by the government or private student loans granted by private institutions. Sometimes student debt consists on a mix of these two kinds of loans. Fortunately, both federal loans and private student loans can be consolidated. However, since federal loans come with subsidized interest rates, common sense advices they should be consolidated separately. |
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Reasons For Consolidating Student Debt
There are many reasons why someone would want to consolidate debt but the main ones are: to obtain lower monthly payments (by getting a lower rate or extending the repayment program) and thus make debt more affordable on a monthly basis, to save money either by obtaining a lower rate or by shortening the repayment program, or (and this reason is often ignored) to beat inflation and avoid the perils that variable rates imply.
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| Variable rates are often lower than fixed rates. This is due to the fact that the lender carries a lower risk and the risk is bestowed over the borrower. If market conditions vary and the cost of money increases, the lender doesn’t have to cope with this increased cost. He will transfer it to the borrower by escalating the interest rate of his variable rate loan proportionally. |
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| When consolidating federal student debt, the interest rate is locked and the new terms on the loan include a fixed rate that will remain the same no matter what the market conditions are. Even though it is possible to consolidate your private student debt and obtain a variable rate loan, that’s not the case in almost every single debt consolidation process; usually all private debt is consolidated into a single fixed rate loan that is more often than not a secured loan. |
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A Brief Comment On Inflation
Inflation occurs when currency loses value and thus the prices of goods and services rise. When this happens, the treasury usually raises the reference rates so as to cool the economy. The problem is that most loan rates are based on these rates and thus, variable rate loans are affected. Therefore, consolidating your debt with a fixed rate loan will save your from the negative consequences of inflation. We will give a thorough explanation of the implications of inflation on debt consolidation in future articles. |
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