What Are Student Loan Consolidation Loans?

NO, there is no typing error here. The term Student Loan Consolidation Loans, howsoever unwieldy, is correct. We shall refer to it as SLCL in this article, which will attempt to demystify the term. Student loans: Student loans, as is common knowledge, are loans taken by students to finance their own education. Parents may also be given such loans for their student-children, and such loans are called ‘Parent Loan for Undergraduate Students’ (PLUS).

These are usually low-interest loans whose repayment has to start when the student starts earning. Student loans are of two types: federal, and private. Federal student loans are underwritten by the federal government. This means that if the borrower fails to repay the lender, the federal government will pay the lender and then collect the money from the student loan taker.

Nearly two-thirds of students in the United States have some debt and, on an average, federal student loans amount to around USD 20,000 per student. Student loan consolidation: Having understood student loan, let us look at what is student loan consolidation. It usually happens a student takes more than one loan in the course of his or her student life.

By the time the student has completed education and started earning, there is a burden of loans to be repaid. These repayments add up to quite a heavy sum every month. To help the debtor cope with debt repayment obligations, his or her outstanding student loans are coalesced into a single loan entailing a lower monthly repayment.

The ex-student thus has more disposable cash to attend to the other needs of life while simultaneously fulfilling student loan repayment obligations. This coalescing of two or more student loans is called ‘student loan consolidation’. SLCL: Now, let’s look at what SLCL – whose expanded name is the unwieldy phrase with which we started – is all about.

How to Calculate your Student Loan Consolidation Amount

Consider that you have three outstanding student loans of USD 10,000 each taken from three lenders. A different lender pays your outstanding to each of your creditors. So, this new lender pays out USD 30,000 to the three lenders who lent you your different student loans. This new lender thus takes up the sum-total of your loan. So, instead of having three creditors to whom you owe USD 10,000 each, you now have only one creditor to whom you owe USD 30,000.

This consolidation of your three outstanding loans of USD 10,000 each has been possible because you have effectively got a fresh loan of USD 30,000 which has directly been paid to your three original lenders so that your loan account them is closed. This fresh loan of USD 30,000 is called SLCL. Simple? Ok. The above example is kept simple to facilitate understanding. The lender extending the SLCL need not be an altogether different entity. It can be one of the three original lenders to you. If all your three loans were from the same lender, then this same lender could also extend you a SLCL.

Philosophy of the basis of the consolidation loans:

While the social philosophy behind SLCL is to minimize the impact of student loan repayments on the borrower’s post-student life , what commercial sense does it make to the SLCL-giver since he is going to charge you a lower interest rate than what it paid out to your original lenders? Well, the answer lies in: volume.

A larger loan, over a period of time, fetches a higher gross income for the SLCL-giver than what it paid out to your original lenders even though it amounts to a lower percentage rate of interest for you. Thus, Student Loan Consolidation Loans makes perfect social sense and perfect commercial sense.