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Student Loan Consolidation

Student Loan Consolidation

For most students emerging from undergraduate and graduate programs, there is a troubling load to bear: unpaid student loans. When there are multiple loans, this sometimes requires separate payments to make each month. One effective way to deal with this is to consolidate all of your outstanding loans under one new loan created by what is called "consolidation". This can simplify the borrower's paperwork (one monthly loan payment to make instead of several) and may bring additional benefits. For instance, in the federal consolidation program, the borrower can extend repayment from the standard 10-year period to 12, 15, 20 or more years (depending on the amount consolidated). This will lower the monthly payment, but will increase the overall cost of the loan.

Private student loans usually cannot be consolidated with federal student loans. The primary benefit of consolidating private loans is the simplification to one loan payment per month. Other possible benefits of private loan consolidation are the reduction of your interest rate (if your credit score has improved since you first got the loan) and lower monthly payments because of extended repayment terms.

How Much can you Consolidate?

Federal Loans

For federal loans, you can include any Direct Loans and FFEL loans up to the total combined remaining balance of those loans. Once you consolidate them, under this program, those loans will be immediately repaid in full on your behalf and you will be paying on a new loan under new terms that you can select under the loan consolidation plan that works best for you.

Private Loans

Consolidation of private student loans varies, so you should contact your lender directly. Be sure to inquire about the interest rate (is it fixed or variable) and about any fees and prepayment penalties.

Key Facts about Consolidation

• The interest rate on a federal consolidation loan is fixed and is the weighted average of the interest rates on the loans being consolidated.
• The length of a federal consolidation loan can be extended up to 30 years which can also help lower the amount of your monthly payments.
• You can choose the repayment plan that best suits your actual income situation. One plan called the Income Contingent Plan will tailor a payback schedule tied to your income.
• Once consolidation becomes active, always maintain contact with the consolidation lender on any changes in your income or unusual circumstances that may affect your ability to maintain payments. Throughout repayment, communication with the lender is critical to protecting you and your credit rating.

How to Consolidate

• Gather all of your outstanding loans.
• For federal student loans, go to the Department of Education's site and follow the instructions relating to completing consolidation on line.
• For private student loans, you should contact the lender directly and ask about their loan consolidation program.
• If you can, arrange for automatic monthly payments from your bank. It will make the entire process simple and it will protect you against missing payments, which is never a good thing.

Consolidating your student loans makes sense in every respect. It's a smart, time-saving, and likely, money-saving strategy.