Consolidating your student loans may help to lower monthly payments.
A signature loan is a type of private loan offered by Sallie Mae. It differs from federal student loans in that the interest rate may be substantially higher. However, like federal student loans, signature loans may be consolidated in order to bring down monthly payments. Care must be taken, however, when choosing the right consolidation plan for your private student loans.
Signature Student Loans
Unlike federal student loans, a signature student loan is awarded based on the creditworthiness of the student or co-signer. A minimum of $500 is available, up to a maximum of $100,000 for undergraduate students and a maximum of $150,000 for graduate students. If the student applies with a creditworthy co-signer, there is no loan maximum. Interest rates are substantially higher than federal student loans, with rates that may be as high as London Interbank Offered Rate (LIBOR) plus 12.75 percent.
Student Loan Consolidation
Student loan consolidation is an option available for borrowers who wish to lower their monthly repayments. Most federal student loans initially have a lifetime of 10 years. However, they may be extended to 25 or 30 years. The interest rate accumulated over these extended time periods will increase, although the monthly repayments decrease. Consolidation may also be graduated, where repayments start off small and then gradually increase, or be income-based, where loan repayments are based on a percentage of the borrower's salary.
Signature Loan Consolidation
Like federal loans, private student loans may also be consolidated. Private student loan consolidation, however, is not regulated by the government. Hence, interest rates may vary over the lifetime of the loan. One alternative to private student loan consolidation is home equity loans. The interest rates are similar but fixed. The money from a home equity loan can then be used to pay off your signature loan, while you may enjoy an interest rate that never increases.
Consolidation Strategies
If you have both federal and private student loans outstanding, it is advisable to consolidate them separately. Federal student loans, consolidated or not, have various incentives such as tax credits. Such incentives will be removed if they are consolidated into one private loan. Furthermore, as the interest rates set by private providers are set by the lending institution and not regulated by the federal government, the overall interest rate paid on your student loans may dramatically increase.
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