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A consolidation loan is just what it sounds
like: You can take two or more outstanding loans and re-finance
them into one. As with the Stafford Loans, there are both
Direct and FFEL consolidation programs.
To a college grad swamped with multiple student loans
that have come due, loan consolidation is an enticing option. When
you consolidate, a lending institution pays off your existing balances
and replaces them with a new, consolidated loan.
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You have just one check to write each month and just one repayment plan to track. |
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You lock in a fixed interest rate that takes the sweat out of variable-rate loans. When interest rates are low, consolidating loans can save a great deal of money. |
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You can extend your repayment timetable from 10 years up to 30 years, depending on the size of your debt, so you can shrink your monthly payments. A consolidation loan may lower your monthly loan payments by as much as 40 percent. |
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Federal versus private consolidation
The key terms for federal consolidation loans do not vary by lender:
no application or origination fees are allowed and there are no
prepayment penalties. Federal law sets the period of time for paying
back the loans and sets a ceiling on the interest rate.
Private consolidation lenders, on the other hand,
are not subject to those terms and may included variable rates and
any number of fees. What's more, some benefits of a federal consolidation
loan, such as interest subsidies on deferred loans, are not available
on private loans.
Yet despite the appeal -- and its popularity -- student loan consolidation isn't for everyone. Here are some frequently asked questions and answers that may help determine if it's the right move for you.
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| Consolidation FAQs |
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Should I
consolidate?
If you need more cash in your pocket right now, consolidation can
help by extending the life of your loan and thus trimming your monthly
payments -- although the length of your repayment terms will depend
on the amount of debt you have, and you may not be able to extend
at all. But if interest rates are low you can lock in long-term
savings, since less of your money will go to interest. You may also
have access to a new repayment schedule (like an income-contingent
plan) that's a little easier on your wallet. If you don't care about
the extra cash and just want a consolidation for the simplicity
of a single monthly payment, you can use any money you save to pay
down the principal. (There are no prepayment penalties for student
consolidation loans.)
When is consolidation
a bad idea?
If you have only a couple more years or a few thousand more dollars
to go till you pay off your student loans, consolidation is probably
more hassle than it's worth. Switching to a new lending institution
might eliminate any benefits you've earned, like lower interest
rates for on-time payments over the years. Plus, consolidating could
make it impossible for you to have a Perkins Loan forgiven or reduced.
If you can handle your monthly loan payment as is, carefully investigate
how consolidating will change the total amount you're expected to
repay.
Who can consolidate
my loans?
You can get a consolidation loan from any private lending institution
with government approval, or from the Department
of Education itself. Not all consolidators are created equal,
however. Some offer favorable terms like interest-rate reduction
for making on-time payments or choosing automatic withdrawal; others
may offer repayment plans that better suit your financial situation.
FinAid.org
maintains a list of student loan institutions, including large banks;
private companies like Sallie
Mae; and state education system lenders like the Missouri
Higher Education Loan Authority and the Utah
Higher Education Assistance Authority. You should do enough
research to be able to negotiate the most favorable terms. Public
and private loans can't be combined, but if you have multiple private
loans, you can consolidate those, too; contact your lending institutions
to find out how.
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