Student loan rates reach record lows

Don't forget to contact your student loan lenders. They'll have information on consolidation loans as well. Ask plenty of questions and be as specific as possible. The aim is to find out how your particular mix of student loans might be consolidated. A general example won't do.

Not sure what lender is handling your student loans? The National Student Clearinghouse has a free loan locator service on its Web site.

New graduates may want to weigh the pros and cons of consolidation loans fairly quickly. After they leave school, there's a six-month grace period before their loan payments begin. By consolidating during that grace period, they'll lock in a 2.77 percent rate on Stafford loans, rather than the 3.37 percent rate that kicks in at the start of the repayment period.

The only drawback to consolidating during your grace period is you'll need to start making payments immediately.

Not ready to give up those blissful, payment-free six months? You could keep much of your grace period by waiting to consolidate until October.

And there are a couple of ways to shave down the interest rate on your consolidation loan even further.

Some lenders will reduce the interest rate on a consolidation loan by a quarter percent when you sign up to have your monthly loan payment debited from a checking or savings account. A lender may also knock down your consolidation loan interest rate by 1 percent after you make 48 consecutive on-time payments.

Be sure to ask about these discounts when shopping for a consolidation loan. These rate reductions are available to student loan borrowers as well.

As good as a consolidation loan may sound, it's not for everyone. Anyone participating or planning to participate in a loan forgiveness program may want to pass on a consolidation loan.

Why consolidate your debt when you can cancel it instead?

A college grad can cancel part or all federal education debt by working in public service jobs -- lower-paying professional jobs that serve low-income communities -- or by volunteering. Loan forgiveness programs are available to everyone from teachers to nurses to young doctors and lawyers to Peace Corps volunteers.

Remember when you consolidate student loans, your original loans get paid in full and you're issued a brand-new loan. A forgiveness program that offers to pay a portion of an original school loan won't be much use to you. You can't cancel a debt that's already been paid in full.

"You essentially forfeit that forgiveness option when you consolidate," says Martha Holler, a spokeswoman for Sallie Mae.

Student loan borrowers with Perkins loans will want to study their consolidation options carefully. Any Perkins loan borrower who is planning to go back to school may want to keep their Perkins loan out of their consolidation mix.

On an ordinary Perkins loan, the government will pay the interest on the loan while you're in school. Consolidate a Perkins loan and you'll lose that benefit.

"With the Perkins loan, if you consolidate you forfeit the interest subsidy you would get while in school," Holler says. "You want to think of all the consequences."

Borrowers who are approaching the end of their repayment terms may want to pass on consolidation, as well. They may be better off stepping up payments in the next year. With such low interest rates on education loans, they may be able to knock out a good chunk of their remaining principal by boosting their monthly payments. Paying an extra $50 a month is a good place to start. Paying an extra $100 is even better.

One more thing to consider: Many lenders will reduce the interest rate on a student education loan by as much as 2 percent after a borrower makes four years of on-time payments. If you'll be hitting the four-year mark on your student loan payments within the next year, you might be better off keeping your old loans. Weigh your options carefully.