Debit Consolidation Loans for Students

If you're a student, more likely than not you have some student loans that you are either currently making interest only payments on, or that are deferred until after graduation. Also, it's likely that you have a combination of federal and private loans. It's fairly rare in this day and age that students can subsidize their entire college education with only federally subsidized student loans. So the situation looks like this: you have both federal and private student loans at varying interest rates, terms, and from different lenders. You're making payments on some and not on others, and you're about to pull your hair out from the frustration of the whole situation.

Debit Consolidation Loan to the Rescue
The answer is simple: get one lender to pay off all the other loans you have, then make one payment to them. Problem solved - almost! You want to be cognizant of your interest rates and payment terms, and make sure you're not paying off your federally subsidized loans with unsecured debt at a higher interest rate.

Secured Versus Unsecured Debt
Here's a crash course in secured and unsecured debit. The former means that you have borrowed money from a lender and put some sort of tangible asset (in most cases) against the loan. If you fail to pay the lender back in the framework of the agreed to terms, they have the legal right to take possession of the asset (a.k.a collateral) and sell it to get their money back. An unsecured loan means that you have borrowed money from a lender and have no asset that will cover the loan if you default. Credit card debit is a great example of this. If you fail to pay off your credit card, all the bank can really do is send debit collectors after you and possibly take you to court to force you to pay, or sell assets. On the secured loan side, think about your car loan. If you fail to pay your car loan the bank will send a repo man in the dark of night and take the car back to sell it. Problem solved.

Lender Risk Versus Reward
Now let's take it a step further. FRom the above example, you can see that it is much more risky for a bank to give out unsecured loans. That is, there is a greater chance of losing their money if the borrower jumps ship. In a secured loan situation, they take possession of the asset and hope to get the lion's share of their money back. In the financial world, that risk is analogous to interest rates. For a greater risk, the lending institution will demand a higher payout. The same runs true for mutual funds and other investment vehicles. If there is larger risk that you may lose money, you expect a great chance of a high magnitude payout. The bank will charge a higher interest rate because they are taking a greater risk.

Back to Student Loan Debit Consolidation
Back to the original point - federally subsided student loans are guaranteed by the government. You don't have to put assets up a gainst the loan because the federal government has guaranteed that the lending institution will get their money back, come hell or high water. That's one of the reasons that federally subsidized student loans cannot be disposed of in a bankruptcy. The government doesn't allow it. So, to bring it all together, don't get a debit consolidation loan for your federally subsidezed loans, only your private loans, because those will be unsecured and at higher interest rates 99% of the time.

In the next article we'll talk about credit card debit consolidation, how the secured versus unsecured rules apply, and how you can really end up screwing yourself if you're not carefull.

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