Any financial process consists of subsequent impact on a host of future financial dealings. In this article, we explain how your finances will be affected for the better or worse when you consolidate your loans. Broadly, consolidation makes its effect felt on the following areas:
-
- Borrower Limit
- School’s Default Ratio
On the Borrower’s Limit
A student who possesses a consolidated loan automatically makes the consolidated loan amount, a determinant of future loan limits. The school can subtract the payment made to the loan from the principal borrowed and keep this amount as a reference for future borrowing. Simply put, if the result after subtraction is large, you may not be allowed to borrow a large amount of money and vice versa. Let us call this result after subtraction, as a ‘reference figure’ for ease of understanding. The subsidized as well as the unsubsidized amounts are considered for calculating the limit on the future loan amounts. Information about these loans are obtained by the school from several official documents like the consolidation paperwork, NSLDS (National Student Loan Data System) and by skimming the loan documents from the centre from which the loans were obtained. Majority of these loan documents can be easily accessed by the school from online resources as they are available on the loan centre’s database.
On the School’s Default Ratio
Cohort Default Rate calculation is not dependent upon the Federal Direct Consolidation Loans Federal Consolidation Loans. More than the loan, it is the status of the loan that determines how the cohort default rate is calculated. If all the loans that you have taken fall under the cohort default rate of the school, consolidation is insignificant. But, if there is an underlying loan that has not been falling under the school’s default rate calculation, even after you have consolidated it at a later stage, when the consolidated loan default may be considered as defaulted when calculated under the school’s default ratio.
Let us consider this example for a better understanding. Suppose you have a loan called A. You have considered this loan under the school’s default ratio calculation. That is, when the school’s default ratio was being calculated, loan A was also under consideration. You now default on Loan A. This will have no impact on the school’s default rate.
Let us look at a case when you have not considered loan A while calculation the default ratio. After the calculation, you consolidate loan A. You consolidate loan A and then default on it. This will impact the default rate of the school.
