College loan consolidation 101
Student loan consolidations bundle student loan debt with one or more existing loans to create one new loan. Consolidations allow borrowers to pay one larger bill instead of several separate loans.
Borrowers who need more cash flow each month may be ideal candidates for a consolidation. By extending the life of the loan and potentially locking in a lower fixed-interest rate, a consolidation can lower monthly payments.
College loan consolidations aren't for everyone, however. If the term of the loan is simply extended, it could end up costing you more over time. Borrowers who can afford their payments should think twice before signing onto a consolidation, and those nearing the end of a student loan obligation may not benefit much from it.
For those who want to pursue a college loan consolidation, consider these seven points.
- Federal consolidation loans don't require application or origination fees. Federal law limits the period of time for loan repayment and caps the interest rate on the loan.
- Private consolidation loans don't have the same restrictions as federal loans and may have variable rates and numerous fees. They may also be stripped of the benefits of federal loans such as interest subsidies on deferred loans.
- Private lenders can issue a consolidation loan with government approval, or you can get one from the U.S. Department of Education.
- Public and private loans can't be combined.
- Pay close attention to interest rates. You can only consolidate once, so if you consolidate at 6 percent interest and rates drop later, you will have missed the opportunity to lock in lower. In certain circumstances, such as going back to school and taking on new loans, you might be able to consolidate again.
- Research student loan institutions online, such as at FinAid.org.
- Read up on student loans to learn about negotiating favorable terms such as interest-rate reduction for making timely payments or opting for automatic withdrawal.