Student Loan Consolidation – Significance of Interest Rate

If student loan is a heavy sum, clearing it presses a huge responsibility on the borrowers. Debt consolidation is a very realistic option in this regard as it ensures reduction on debt balance. However, how much you can save on loan depends on interest slab available to you.

Several lenders offer student loan consolidation program. Every consolidation program is not attuned to the same interest rate. With different options open, you can definitely get a comfortable rate of interest that will reduce your payable amount to the lowest figure.

How Debt Consolidation Works

If you want to swoon on the best consolidation deal, understand how the program actually works. Debt consolidation refers to merging of all the existing loans into a single one. It means that from now on, you have only a single debt to pay off in full within a rescheduled time according to the debt consolidation contract.

Debt consolidation interest rate comes in a lot of variations. What you need is to find out the best deal that offers a comfortable margin for interest and easy repayment terms. It is a constructive thought to stretch your repayment period to 10 years so that regular payback on consolidated balance shrinks to a minimum figure.

Rate of Interest – Fixed Vs. Variable

Interest on consolidated loan is of two types – fixed and variable. Both f have some pros and cons and interestingly, advantages of one type are counteracted by the other. This creates confusion for the students as to which one to go with. Whatever you chose will leave massive impact on your affordability. Your payback ability should be a key factor while considering a certain type of interest rate.

Fixed rate remains unchanged throughout the loan tenure. This facilitates budgeting for repayment. Changing character of the market has no influence on interest. Most of the students follow fixed interest rate structure. However, one must keep in mind that fixed rate is higher.

Variable rate rhymes with the economic ups and downs. The rate remains low at starting but may increase sharply depending on the market condition. However, if the rate goes down, monthly payment also drops, thereby benefiting the debtors.

Best of Two Sides

‘Mix and match’ is possible and works out quite fine. This feature is quite common in case of mortgage loan and has been extended to student debt loan consolidation. The idea can be put in the following way.

For 20% of consolidated balance, a fixed interest structure is followed whereas variable rate is applied to the rest of the sum. The objective is to allow the debtors to enjoy low rate at starting with added benefits of fall in interest rate should the event be favorable. If the interest rate rises, they can at least have the consolation that it applies to only a part of the loan and not to the entire sum.