The newest student loan data has everybody, from the federal government to the students holding the debt, very concerned. FinAid’s student loan debt clock shows that at the time this article was posted, total debts exceeded $1.2 trillion.

A study by the Project on Student Debt of the Institute for College Access & Success reported that seven in 10 students in the class of 2012 graduated with student loan debt; the average debt was $29,400. Meanwhile, figures from The College Board showed that in 2013 to 2014, colleges continued to hike tuition costs (though somewhat less than in the past). At public four-year colleges, the average was 2.9%; at private colleges and universities, 3.8%.

In most cases, there’s no way to avoid paying back those loans. After you determine that you don't qualify to have your loans forgiven, it's worth investigating strategies that can keep interest and payments on student loans to a minimum. Mostly this involves some form of consolidating your loans into one or two monthly payments that are easier to handle and keep on top of.

Could Your Loans Be Forgiven?

Some people with federal loans are eligible for partial or full loan forgiveness (you don’t have to pay back the money you borrowed). For example, teachers with certain federal loans who spend five years teaching in an underprivileged school may qualify. Learn more at the Department of Education website. Other circumstances may qualify you for forgiveness. This website will help you determine whether you’re eligible. For more information, read Debt Forgiveness: How To Get Out Of Paying Your Student Loans.

Two Types of Loans

The rules for consolidation are different depending on the type of loan you have. Federal loans come from the federal government. They may be serviced by companies other than the Department of Education, but they are still considered government loans.

Private loans come from banks, credit unions or other lenders. Private loans aren’t eligible for the same consolidation rules and options as federal loans.

You may have both federal and private loans, especially if you have a number of loans. If that is the case, you will probably need to consolidate each type separately.

Why Consolidate?

First, because keeping track of payments on multiple loans can be tricky, especially when a third party purchases one or more of your loans from a lender. Consolidation will greatly reduce the number of payments you have to make each month. You may still have more than one payment, but it will be less confusing.

Second, your interest rate will likely be locked in, giving you a fixed rate for the life of the loan. Some of your current loans might have a variable rate.

Finally, by spreading out the term of the loan, you are likely to end up with a lower monthly loan payment. However, this will likely leave you paying more in interest by the time the loan is paid off.

The other caution is that consolidation might take away benefits attached to some of your loans, such as discounts on the interest rate or principal rebates. For more discussion of this issue, see Student Loan Debt: Is Consolidation The Answer?

Federal Loan Consolidation Options

Under the College Cost Reduction and Access Act of 2007, the federal government expanded its consolidation options for federal student loans – especially the variety of repayment plans.

If you have federal student loans in repayment or in the grace period before payments begin, you can apply for consolidation. Apply online here.

During consolidation, you’ll be eligible for certain repayment plans that make payments more affordable.

Standard Payments are a fixed amount each month. You’ll pay less interest, but the payments will be higher. Payments last for up to 10 years.

Graduated Payments are lower at first but will increase periodically, normally every two years. Payments last for up to 10 years.

Extended – Payments could be fixed or graduated. Payments last up to 25 years, so monthly payments will be lower but you will pay more interest.

Income-Based – Maximum payment is capped at 15% of your discretionary income. Payments change as income changes and last up to 25 years.

Pay as You Earn – Payments are 10% of discretionary income and can last up to 20 years.

Income-Contingent – Payments are calculated annually based on your adjusted gross income, family size and total loan amount. Payments can last up to 25 years.

Income-Sensitive – Calculated based on annual income with payments up to 10 years.

Learn more about these repayment options here.

Consolidating Private Loans

Consolidating private student loans is basically the same as other loans – like a debt consolidation loan, for example. Your eligibility is determined by your credit score and other financial factors.

Pros and Cons – The advantages are the same as for federal student loans (though, probably, with less advantageous terms). You’ll lock in one payment, you may get a lower interest rate, and the terms will reset allowing for a lower monthly payment over time.

The disadvantages are also the same. Longer and lower payments equal more money paid in interest.

Finding a Lender – Private consolidation is trickier because you have to pick a lender. Since this is a loan like any other, shop around. Compare interest rates and whether they’re fixed or variable. Compare fees and prepayment penalties. Research the institution, including what other people say about its customer service. Talk to somebody on the phone if the lender isn't local to get a gut feeling about how it operates.

Most banks offer student loan consolidation. Start with your bank or credit union if you’re happy with it. If you would rather go elsewhere, finaid.org lists lenders and their repayment terms. The list isn’t necessarily of recommended lenders; it's just a chart for comparison purposes.

Don't Pay Extra

As with everything in the private market, there are consolidation services that market these loans. Remember that applying for federal consolidation is free. No company should charge you to apply.

The Bottom Line

Consolidation not only bundles your loans into fewer payments, it renegotiates the loans' terms. The longer the consolidation loan is – and the lower its payments – the more money you’ll pay over time. If you have the means to pay the loans, don’t use consolidation to unnecessarily spread the payments over a longer period of time. Pay off your loans as soon as possible to save on interest and gain the financial freedom you deserve.

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