How to shop student consolidation loans

If you're interested in consolidating student loans, the process is getting easier and faster.

That fact, plus a recent Department of Education decision that allows in-school students to consolidate, has a lot of scholars shopping for deals.

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Those provisions that give the green light to in-school consolidation, however, have "been in the Higher Education Act all along," says Dan Madzelan, director of forecasting and policy analysis in the Office of Postsecondary Education.

While the interest rates on federally guaranteed educaton loans were at an all-time low, there was a good reason for in-school students to consolidate. But now that rates have increased again, Madzelan questions why students still in school "would want to enter repayment early if the government is paying the interest on the loan?"

So whether you're still in school or a graduate, the key is: Shop smart by asking the right questions. Most important: Is consolidation good for your particular situation?

If you want to stretch out your repayment period or lock in the current rates, you're on the right track. But you also want to find out if you stand to lose anything, too.

If students consolidate after graduation, they have a six-month grace period before they have to start making payments. They lose that if they consolidate while still in school.

The type of loan makes a difference. Current students should only consolidate variable-rate loans (such as Stafford), not fixed-rate loans (such as the Perkins), says Nancy Coolidge, coordinator in the office of the president at the University of California. "There's nothing to gain and a lot to lose."

Not only is the interest on Perkins loans subsidized while students are in school, but also the program allows unconsolidated portions of the loans to be forgiven if the borrowers enter certain professions, such as teaching, says Coolidge.

That's why you need to get specific. Talk to a financial-aid officer at your school. Ask each lender the same question: What -- in basic terms -- do you stand to gain and lose if you include each of your different loans in a consolidation. You want someone who will honestly cover the pros and cons.

In many cases, consolidation makes sense.

With a Stafford loan, "a student is going to save significant money," says Ronald W. Johnson, director of financial aid for UCLA and co-author of "Financial Aid for College: Understand and Plan Your Funding Options." Barring special factors, "it's going to be a better deal for them."

Where do you go?
If you're like a lot of students, you're getting a ton of consolidation offers. So how do you choose a lender? A good bet: Start with the one or ones already holding your loans. "Start with the lender that holds the majority of your loans, in the interest of time," says Erin Korsvall, spokeswoman for SLM Corp., commonly known as Sallie Mae, one of the largest student-loan providers.

And if you've borrowed from one lender, (unless you have a direct loan through the Department of Education), you only have one consolidation option: your current lender.

If you have loans through more than one lender, your lender doesn't offer consolidation loans, or if you have a direct loan through the Department of Education, then you can get a consolidation loan wherever you want.

It's also smart to shop and compare several lenders. If you're considering a company you haven't borrowed from, look for a name you recognize or one on your financial aid office list. A lender "is not going to be on a school's lender list if they are a suspect type of organization, because the school will have normally done a great degree of research and field testing," says Johnson.

Financial aid offices won't recommend lenders. But if you ask specific questions about what they know about the lender or how the lender treats customers, you can get some solid information.

And look at any information the company has sent you. Is it help or hype? Are the assertions truthful or bordering on a lie? "If the company is giving you information that isn't true, is that a company you want to do business with?" says Ellen Harris-Small, assistant manager for billing and collections, Rutgers University.