Student Loans: Facts and Consolidation
Education is important. It definitely is. What better way to ensure your future than to equip yourself with quality higher education? You might have dreamt of becoming a doctor, engineer or lawyer in the future. Unfortunately, this privilege may not be readily available to some. Some may not be able to afford to pay the costs of higher education out of their current income. This is where student loans come in.
A student loan is an unsecured debt primarily available to students who want to secure higher levels of education. This usually includes payments for tuition fees, board, lodging, books, supplies, equipment, such as calculators and laptops, and other miscellaneous expenses.
When you’re a senior in college, you might already be begging for graduation. It is certainly an occasion to celebrate, but you might already be stressing out and overwhelmed by the idea that it’s payback time. And while you are very eager to start paying off your students loans, here come some factors which will prohibit you from paying debts. One of the most common is the unavailability of funds. Since you are still a fresh graduate, you may not be able to settle them all instantly. The worst case scenario is that you won’t be able to pay even a single cent of your debts….YET. The good news is that it’s possible to pay off multiple debts through debt consolidation loans. Consolidating your debts can lower your monthly repayments and save your money from interest costs.
While there are perks in consolidation, be wary that the move can adversely affect your credit score. Before you decide to consolidate your student loans, it is important to know and understand if consolidation hurts your credit.
Your credit score could take a small hit – at first. A consolidation triggers a hard inquiry to your credit history. What is a hard inquiry and how does it affect your current and future credit?
A hard inquiry is a credit inquiry where a potential creditor reviews your credit before making a lending decision. These are commonly done for applications for auto loans, mortgages, and credit card loans. A hard inquiry can lower your score by a few points. Most of the applications are rarely affected by the hard inquiries. While this type of inquiry may damage your credit score, the impact usually decreases, or at most, totally disappears after some time.
Common Hard Inquiries
Hard inquiries are done for loans with higher risk, such as:
- Mortgage applications – Mortgage is a secured debt instrument, most commonly by real property, used to purchase a larger real estate or real property. Individuals and businesses use a mortgage to procure new properties without paying the entire purchase price up front.
- Auto loan applications – As the name suggests, auto or automobile or car loan is a sum of money borrowed to buy a car.
- Credit card applications – Credit card is an unsecured, consumer loan, usually incurred through revolving credit card loans.
- Personal loan applications – These are for loans for personal purposes and disbursements, such as for medical, educational, household repairs and vacation purposes. Personal loans are either (a) secured, or those that are extended with collateral or those co-signed by a guarantor, or (b) unsecured or those that are lent on the basis of the borrower’s credit history and ability to repay the loan from personal income. Repayment for both types of personal loans is through a fixed amount of monthly installments plus interest over a fixed period of time.
- Apartment rental applications – These are for loans which will be utilized to rent or lease condominiums, apartments or townhouses.
- Student loan applications – These are federal rights of a student to exercise and secure loans for educational purposes. Student loan commonly covers the following schooling-related expenses:
- Tuition and related fees
- Room and board (on- or off-campus)
- Equipment and supplies, such as a computer, notebooks or course-related materials
Consolidation of Student Loans
The most common consolidation technique of student loans is the Direct Consolidation Loan, which allows students to consolidate or combine multiple education loans into one loan. This will result in a single monthly payment instead of multiple payments. This may ensure on-time payments since it is easier to monitor and budget every month.
As a debtor, you would be concerned with the effects of the consolidation to your credit score: What are the benefits of consolidation? Will debt consolidation improve my credit score? Does consolidation hurt your credit score?
By consolidation, you may observe a quick jump in your score in a few months, especially upon settlement of the consolidated multiple debts. The more complex mix of your credit can also improve your score. However, it can also have a negative impact on it. Upon receipt of the loan proceeds, your utilization rate which is inversely proportional to your credit, increases. With this, your credit score will decrease and would result in a “lesser good” credit score. Also, the score will be adversely hit by the hard inquiry which will be done on your loan applications. These, however, are all temporary, and the positive outcome will be observed soon, after settlement and achievement of the purpose of the decision to consolidate.
Credit scores play a vital role in your financial well-being, and just like any other actions and decisions, you might have already taken into your life, consolidating your students loans will have both positive and adverse effects on your score. Among all of its other benefits, consolidation of loans is done to ensure that you will be able to repay every single cent you borrowed. And if you decide to use debt consolidation to finally be debt-free, debt consolidation can definitely and significantly be of great assistance.
|Marina Thomas is a marketing and communication expert. She also serves as a content developer with many years of experience. She helps clients in long-term wealth plans. She has previously covered an extensive range of topics in her posts, including money saving, Budgeting, business debt consolidation, business and start-ups.|