Scholarships may be difficult to source, but they are available if you’re dedicated enough and do the footwork. Low income families can qualify for FAFSA support. Ethnic groups have many options in America. If you’re neither of these, it’s very likely you can source some politically-motivated scholarship from either spectrum. But should the worst come to the worst and you find yourself unable to obtain requisite funding through the scholarship route, you still have options for financing from the loan sector.
But you’ve got to be careful here, because the wrong kind of loan can end up haunting you for the rest of your life, requiring you to consolidate.
The pros and cons of student loan consolidation are numerous, understanding them requires understanding what consolidation is—as StudentLoansConsolidation.co cites: “…consolidation involves the combination of one or more federal student loans to create a unified new loan.”
Now, this isn’t all advantage. There’s a lot of advantage here; the term limits of the loan are extended, meaning hikes in interest rates may be defrayed depending on who you consolidate through. But consolidation basically means starting over.
If you’re paying $30 a month on a $30,000 loan, without any interest it will take you 83 years and 4 months to pay off. If you’re paying $100 a month, it will take you 25 years. Again, that’s without any interest. When you’ve got 5% interest compounded annually on the principle, the loan goes up by $1,500 every year.
This means in 25 years, at 5%, the loan has gone from $30,000 to $67,500. Obviously, you’ll have to pay more than $100 a month on it. At $200 a month, you’re looking at 12 years and 6 months without any interest. With the 5% rate, you’ll only end up whittling it down about $900 a year, meaning it takes 33 years and 4 months to pay off.
With all this in mind, when it comes to consolidation, you may be paying less every month against your principle, but there’s likely a new interest rate, and the design is to keep you paying a regular amount every month for many years. Some consolidation companies are perfectly happy if you’re paying off a loan the rest of your life.
Strategizing Your Finance Plan
The key is to understand trends and plan accordingly. College students in 2014 exited their universities with an average of $33,000 in debt. At the previously supposed 5% annual interest rate compounded on the principle, and not the new sum including interest, you’ll need to pay $400 a month to pay that off in 10.5 years.
Now, this assumes the interest is compounded on the original principle ($33,000 in this case), and not the adjusted principle (which would be the amount owed at the end of each year after you’ve made payment). Obviously, many banks prefer to keep charging interest on the original principle, as it makes them more money.
But if you can find a solution which charges interest on the principle as it is whittled down over time, you can shave years off what you owe and save many thousands of dollars over time.
For example, at $400 a month, $33,000 becomes $28,200, which is $29,850 after interest. Interest on $33,000 is $1,650. Interest on $29,850 is $1,492.50. So you see what you owe in interest continuously diminishes under such an arrangement, making it preferable.
That is, of course, assuming you can pay $400 a month for ten-odd years. And even then, at 5% interest, your loan has nearly doubled by the time you’re through. It’s gone from $33,000 to $50,400, total, interest included. The takeaway? Pay as much off every month as you can.
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