For many people, the government student loans or private student loans they carry after they graduate from college or university are their very first experience with debt. This means that terms like fixed-rate, variable-rate, and consolidation are new and unfamiliar. Learning about financial terminology can be intimidating, but the more fully you understand your student loan package the more likely you will be to be able to develop a smart and realistic plan to get out of debt.
Understanding the conditions of your loans can help you save money and help you develop the financial know-how that will help you throughout your lifetime. There are two basic kinds of student loans. One has a fixed interest rate, and one has a variable interest rate. As the names suggest a fixed-rate loan will maintain the same interest rate for the duration of the lending period no matter what changes, growth, or crashes the financial sector experiences in the coming years. A variable rate loan on the other hand is subject to market fluctuations. If your student loan has a variable interest rate, the amount of interest you will be asked to pay in the future can rise and fall with market trends.
When it comes to federal student loans or alternative student loans the biggest question is whether to consolidate your loans or not. In some cases, consolidating your loans can lower your monthly payments and help you avoid high-interest rates which can be a winning combination that can save you money in the short and long term. However, student loan consolidation doesn’t make sense for everybody. Before you decide whether to consolidate, make sure you clearly understand the terms and conditions of each of your student loans.
Consolidation allows you to combine several loans of different types into a single, fixed-rate loan. This means that you will only have to make a single payment every month, no matter how many lenders initially helped you pay your way through school. Often, consolidating student loans allows you to extend the repayment period, which means lower payments every month. So, if you are finding that your monthly payments are becoming a serious financial burden, consolidating your loans can offer some relief.
Remember, however, lower monthly payments can also mean a longer repayment period. So if your top priority is to get out of debt quickly, consolidating your student loans may not be a good choice. If one or more of your loans are variable rate, consolidation can offer you security by allowing you to plan on a fixed interest rate for the duration of your repayment period. However, in many cases, the interest rate on a consolidated package is higher than the average market rate, so if the majority of your US student loans are already fixed rate it usually doesn’t make financial sense to consolidate student loans.