"That new loan will have its own interest rate; it will have its own repayment terms; it will have its own terms and conditions," she says. This can be attractive to borrowers because the consolidation frequently results in longer repayment periods and lower monthly payments.
Consolidating federal student loans
When it comes to consolidation, the types of loans you have matters, but most federal loans, including Stafford, Perkins, Direct Plus and Supplemental loans, can be consolidated with other federal student loans.
"The interest rate on (federal) consolidation loans is an average of the interest rates on the (federal) loans you're consolidating," says Ken O'Connor, director of student advocacy for Fynanz, a New York City firm providing technology for the private student loan market. Even if your rates seem high, t he Department of Education puts a cap on consolidation loan rates at 8.25 percent.
One major advantage of federal consolidation loans is that borrowers don't need a stellar credit score to qualify, they can apply any time (even if their loan is in default) at LoanConsolidation.ed.gov, and they'll always get a fixed interest rate. Regardless of how the market fluctuates, borrowers will never pay more than 8.25 percent on their consolidation loans.
Private loans can typically only be consolidated with other private loans. And once consolidated, they usually have variable interest rates, O'Connor says. So when you apply counts. Consolidating private student loans when interest rates are low (like now) "could potentially save thousands of dollars." It also means your interest rate can fluctuate higher as the years tick by.
Unlike federal loans, it can be trickier to get your private loans consolidated. Private lenders require borrowers to pass a credit check to get the best rates. That means if your score isn't superhigh, you could wind up paying more if you consolidate. It also means if you're a new grad with little credit history, you might need a co-signer to be eligible. If a co-signer is necessary, O'Connor says borrowers should ask if there's a co-signer release option after a certain period of time.
"With (our student loan program), if the borrower makes 12 months of on-time principal and interest payments, they can request to release the co-signer," he says. "That creates tremendous flexibility, especially for families applying for loans for multiple kids."