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How To Define School Loan Consolidation

Everyone describes the act of consolidating school loans slightly differently. Some say consolidation cuts your monthly payments. Others prefer the interest rate decrease after 36 months more useful. Finally, others enjoy only paying one bill each month.

Regardless of your preference, school loan consolidation encompasses all of the above, and can almost certainly assist you with either multiple federal loans or private loans.

Looking at federal loan consolidation, this is a fixed-rate refinancing program that combines all of your existing federal loans into one new loan. Examples of potential loans you can consolidate include Stafford, Parent PLUS, Perkins, and Direct. In terms of saving money, school loan consolidation can lower monthly payments up to 53%.

Alternatively, private student loan consolidation is a separate program for refinancing all non-federal school related debt. This method of consolidation offers the convenience of single, lower monthly payment for an individual’s private loans.

Federal Student Loan Consolidation

Legislative has recently (7/1/06) been passed regarding federal loans. In-school consolidation is no longer an option. You will need to be out of school to be eligible to consolidate. Next, you’re no longer required to have multiple lenders. And, you are no longer able to consolidate your loans with your spouses’ loans.

A federal consolidation loan is a governmentally ‘set’ term and will be the same regardless of who your lender is. Many people consolidate with the government because they assume they will have more ‘benefits’ than other programs. The reality is that the benefits of the loan will be the same regardless of whom the loan is through.

The primary conclusion, or the “financially smart” option is not going to be the same for each student. It is a factor of how you plan to repay your debt and what is most important to you at this time in life. It also depends on where you live. Consider all options, most states offer many different types of consolidation programs. Here are some examples:

Quick Repayment (1-3 years)

• .25% interest rate reduction for auto pay

• 5% principal balance credit

Extended (beyond 8 years)

• .25% interest rate reduction for auto pay

• 2.25% reduction after 48 on-time payments

Intermediate Repayment (3-8 years)

• .50% reduction for auto pay

• 1.25% reduction after 48 on-time payments

Private Loan Consolidation

As with federal loan consolidation, we must first look at the changes and considerations for private loan consolidation. First, you cannot consolidate private loans until you’re out of school and beginning repayment. Next, you cannot consolidate private loans with federal loans.

And unlike federal consolidations, in the vast majority of instances, consolidation private loans will leave you with a variable rate loan, not a fixed interest rate. Remember after checking all of your options, keep in mind that the best option is often to leave your loans alone.

As mentioned, there are only a few companies that don’t have stipulations in order for you to use their consolidation refinance program. You will want to shop closely the loan rates and terms because the lender, not the government sets the interest rates (most are linked to the Prime Rate.)

Perhaps the most important question to ask is “how is your credit now”? And what did it look like when you first took out your loan? Private loans are credit-based and if in any way you have had problems along the way you should reconsider.

Also, remember most companies will assess fees to consolidate, along with maintaining a variable rate, even if your credit has not dropped. It can be a difficult decision and only you can decide after knowing your financial situation if consolidation will lift that burden or increase that burden.