Facts About Student Loan Consolidation

Like many college students, you probably didn’t give much thought to your student loans while you were in school. Once you graduate, however, you are faced with the daunting prospect of paying off all of the debt you incurred during your time at college. Consolidating your loans is one way to make this process simpler and you may even be able to lower your payments and interest rate. When you apply for financial aid, whether you do it through the federal FAFSA program or through a private lender, this aid often comes from several different sources. Once your loans come due, you will receive bills from each of these sources and have to pay all of them individually. Consolidating student loans simply means bundling of your different loans into one loan with a single monthly payment.

There are a few instances when consolidating your student loan may not be the best choice for you.

• If your federal loans are newer, they have a fixed interest rate, and you will probably not see much of a change in your rate by consolidating. In fact, you could actually end up paying a higher interest rate. When loans are consolidated, the lender takes the weighted average of all of the interest rates of the individual loans and rounds up to the nearest 1/8 of a percent. A loan with a higher interest rate than the rest will drive up the average and potentially cost you more in the long run than just leaving the loans separate.
  

• You are only allowed to consolidate your loans one time, so if you consolidate when the interest rates are high, you are stuck with that higher rate once the rates drop again. If you suspect that interest rates may drop in the near future, you may want to hold off consolidating your loan.
  
• You can't consolidate private and federal loans together.
  
• Consolidating your student loans may lower your payments, but you could end up paying more overall because you repay the loan over a longer period of time.
• When you consolidate subsidized stafford loans, you retain all of the interest benefits. When you consolidate Perkins loans, however, you lose the 9 month grace period, subsidized interest and the loan forgiveness provisions.
  

There are several reasons why you might want to consider consolidating your student loans:

• You will only have one bill and one payment to make each month.
• If your unconsolidated loans carried variable interest rates, you can lock in a fixed rate for the life of the loan.
• You can often get an interest rate discount if you consolidate during the loan grace period or sign up to have your payments debited from your bank account.
  
• The balance of your loan is paid off over a longer time so the monthly payments are lower.
• You don’t need a credit check or cosigner to consolidate your student loans.
• There are a variety of repayment options and no prepayment penalty.
• If you lose your job at some point, you still have to option to defer your loan payments.

• Unfortunately there are many student loan consolidation scams out there. Make sure the company you are dealing with is legit.
• Not every lender is created equal, so shop around to find the best deal. Make sure you understand the terms, fees and penalties completely.
• There are a variety of repayment options, so read through them thoroughly before you pick the one that is right for you. There is often some flexibility here and you are able to switch your plan in the future if your needs change.
• You still have the ability to apply for a deferment or forbearance on your student loans if you lose your job or experience financial hardship.
  
• Many lenders will offer a 20 year repayment plan, but you can opt to repay your loan in a shorter amount of time to reduce the amount of interest you pay. Keep in mind that your monthly payments will be higher with a shorter loan term.
• When you consolidate your students loans during the grace period you lose the remainder of the grace period time and have to begin repaying the loan immediately.
  

When you consolidate your student loans, you will need to choose a payment plan. Find out as much as you can about each plan in order to choose the one that is best for you. Remember that you always have the option of switching plans later on if your circumstances change.

Standard Repayment Plan

With this plan you will have a fixed amount to pay each month. The loan term is up to ten years with a minimum monthly payment of $50.

Extended Repayment Plan

If you have more than $30,000 in student loan debt, you can stretch your payments out over 25 years. You can either pay a fixed amount every month or set up graduated payments as described below.

Graduated Payment Plan

This payment plan is good if you expect your income to start out low and then increase over time. Your student loan payments are low at first and then increase gradually every few years.

Income-Contingent Repayment Plans

With the Income-Contingent Repayment Plan your monthly student loan payments are recalculated each year based on several factors. Some of these factors include you and your spouse’s adjusted gross income, your family size, and the total loan amount. This payment plan can extend for up to 25 years. Any student loan debt that remains after 25 years is discharged.

Income-Sensitive Repayment and Income-Based Repayment plans are also available. These are similar to the Income-Contingent Repayment Plan in that your monthly payments are tied to your income. The terms and benefits of each of these vary, so speak with your financial adviser to find out which plan is best for your circumstances.

There are many pros and cons to consolidating your student loans, so do your research. Many of your questions can be answered by your lender or school financial counselor. Once you have the facts, you can make a decision that makes the most financial sense to you.