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What Is Student Loan Consolidation?

Consolidating your loans can be very confusing. There are many questions you need to ask and to have answered before proceeding with this endeavor. In a lump sum it can sound terrific, yet you need to know more about the full puzzle to be sure.

Loan consolidation is when one vendor, who opens a new loan, pays off several different loans. This new loan allows you to pay just one bill instead of several different loans, maybe from several different lenders. There are benefits to consolidating debt, but there can be drawbacks also.

Depending on your own situation, you will need to discover whether consolidating loans or keeping loans separate is the best for you. Indeed it is great to have the benefit of paying one monthly bill and knowing that your debt is through one financial lender.

The monthly payment is usually much lower on consolidated loans than individual loans. They will take all of your loans, refigure them as a new loan package and then you will be offered different options on how fast you want to pay them back.

The flip side of this is that if you have private lenders for your loans, you will not be able to consolidate your loans through federal consolidation. There are some private consolidation lenders you may want to look into. Keep in mind that they are not held to the same regulations that federal loan consolidation programs are by law.

How To Consolidate Your Student Loans

To consolidate your loans, log on to FinAid for an extensive listing of banks that can provide information, and set up, your consolidated loans. You will need to fill out a little information on yourself and then the financial institution of your choice will handle the rest of the work. Make sure all of your information and records are accurate.

You may only consolidate once, so if rates do go down you will be stuck with your current rate. However, with loan consolidation you generally get a lower fixed rate for your consolidated loans than on individual loans. A fixed rate means that they won’t increase your rate later on as inflation rises. This works in your favor, since rates tend to increase as time goes on.

Tips You Should Know Before Loan Consolidation

Students should only consolidate variable rate loans (for example, Stafford Loans), not fixed-rate loans like Perkins loans. Because Perkins loans are fixed rate, there is no financial benefit and you may lose some loan forgiveness provisions.

Student loan consolidation programs are not the same among lenders, with varying interest rates, grace periods, penalties for late payments, time for loan repayment, and other incentive and discounts. So, it’s best to shop around!

Although consolidation lowers monthly payments, it also means more interest will be accrued over the life of the loan and significantly increase the loans total cost. To best reap the benefits of consolidation, try to make the same monthly payments and pay the loan ahead of time.

To lower total interest rates and cost of your loan, you may not want to consolidate all of your student loans (for example, you may choose to include only unsubsidized loans or exclude a high interest loan with a low balance.) Check with your lender which options would be best for you.

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.