Student Loan Consolidation

What Is Student Loan Consolidation?

Student loan consolidation is a process through which you take out a new loan, which is then used to pay off your other existing student loans. Instead of having multiple loans and loan payments, you have only one. You can consolidate all federal student loans and most private student loans.

The amount of money you are eligible to borrow depends on your college costs for a particular year. If you graduate in four years, you will likely have four loans—even more, if you also took a private loan for additional funds.

Loan consolidation can simply your life, but you need to do it carefully to avoid losing benefits you may currently have—or be eligible for—under the loans you have now. But first you need to be sure if you're eligible to consolidate. Only then should you begin looking for the best loan options available to you.


Student Loan Debt: Is Consolidation The Answer?

Eligibility Requirements for Student Loan Consolidation

In most cases you are considered eligible to consolidate your loans if you are:

  • Not currently in school or are enrolled at less than part-time status
  • Currently making loan payments or are within the loan's grace period
  • Have a good repayment history (meaning you are not in default on your loans)
  • Carrying at least $5,000 to $7,500 in loans

While you do not need to meet any minimum for combining debt under the federal Direct Consolidation Loan program, private lenders and loan companies tend to demand a minimum loan balance. You cannot consolidate private student loans with federal student loans, and you can only consolidate the loans you hold in your name; this means that you cannot consolidate your own loans with your spouse's or with loans your parents may have taken out to finance your college education.

Pros and Cons of Student Loan Consolidation

While the consolidation process will simplify your life and make it easier to make sure you are up to date on loan payments, there are some negatives you need to consider.

  • Streamlining your bill-payment process

  • Extending your repayment term

  • Lowering your interest rate

  • Switching from a variable-rate to a fixed-rate loan

  • Lowering the monthly payment amount

  • Getting into an alternate repayment plan

  • Graduated repayment (monthly payments start low, then increase)

  • Income-sensitive repayment (monthly payments are a percentage of pretax income

  • Getting borrower benefits

  • Paying more in total interest

  • Having a larger total loan repayment amount

  • Being in debt longer (if you extend your loan period)

  • Losing borrower benefits from your current lender (i.e. interest-rate discounts, rebates

  • Having to repay borrower benefits (i.e. rebates, fee waivers)

  • Possible prepayment penalties

  • Loss of grace period on original loans, if any

  • If you consolidate a mix of federal and private loans, losing the protections federal student loans provide.

Advantages of Consolidating

Note that some consolidation pros apply just to federal loans or just to private loans. This is one reason that, if you have both types of loans, you may want to consolidate them separately (see below). Also: You can also always keep separate a single loan that has especially good borrower benefits.

Applies to All Loans

Streamlining your bill payment process: With just one loan, you have only one repayment due date to remember and one check to write.

Extending your repayment term: With a new loan, you can lengthen the amount of time you have to repay, often between 12 and 30 years (up from the standard 10).

Lowering the monthly payment amount: Lengthening the term of your loan means that you will be paying less each month.

Getting borrower benefits: Lenders will often offer loan holders certain benefits (discounts for auto-payments, a record of on-time payments, etc.) for being a good borrower. If your lender does not provide any benefits, you may want to consider consolidating your loans with a lender who does.

If you consolidate a mix of federal and private loans, losing the protections federal student loans provide.

Just for Private Loans

Lowering your interest rate: If you have one or more private student loans and have improved your credit score since obtaining your loan, you may be able to qualify for a consolidated loan with a lower interest rate.

Switching from a variable to a fixed-rate loan: If you have private student loans at differing variable rates of interest, you may be able to consolidate and get one new loan with a fixed rate of interest—a good move if rates have dropped significantly since you were in school.

Just for Federal Loans

Getting into an alternate repayment plan: Consolidation can make you eligible for federal loan programs that make it easier to pay off your loans.

  • Graduated repayment allows you to begin payments at a lower monthly amount, then gradually increases that repayment amount every two years.
  •  Income-sensitive repayment, which calculates your monthly payment amount as a percentage of your pretax monthly income.

Disadvantages of Consolidating

The cons to consolidating your student loans apply to all types of loans.

Paying more in total interest: That's because you'll start the loan repayment clock again and it will probably be for a longer time. Therefore, even though your interest rate is the same or lower, you'll likely end up paying more interest.

Having a larger total loan repayment amount: More interest means your total loan repayment will likely be higher.

Being in debt longer (if you extend your loan period): As discussed above.

Losing borrower benefits from your current lender (i.e., interest-rate discounts, rebates): If the benefits are really lush for a particular loan, you don't have to include it in the consolidation.

Having to repay borrower benefits (i.e. rebates, fee waivers): Factor these, if any, into your consolidation loan's total cost before you decide to consolidate, and which loans to include in the mix. 

Possible prepayment penalties: Keep these in mind when you schedule your loan consolidation.

Loss of grace period on original loans, if any: Student loans often have a post-graduation grace period before you have to start repayments. Your consolidation loan probably won't have this.

If you consolidate a mix of federal and private loans, losing the protections federal student loans provide: Investigate the federal Direct Consolidation Loan program to consolidate your federal loans.

Do the Loan Consolidation Math

You should be wary if a private lender promises to dramatically lower your interest rate by consolidating your federal student loans. The truth is that lenders weight the average of the interest rates you're currently paying on your existing federal student loans and then round that number up to the nearest one-eighth of a percentage.

While the interest rate on the new loan may be lower than the higher interest rate, it will also be higher than the lower interest rate you're currently paying. So overall you'll be paying about the same or perhaps just slightly more for your new, consolidated loan.

Here's an Example

Marisa is paying 3.6% on a $3,500 Stafford loan and 6.8% on a $6,500 Stafford loan. If she were to consolidate those loans, a legitimate lender would calculate her new interest rate using the following formula: ($3,500 x 3.6%) + ($6,500 x 6.8%) / ($3,500 + $6,500) = 5.68%. This would be rounded up to 5.75%. While the overall interest rate on the consolidated loan is less than the 6.8% Marisa was paying on the $6,500 loan, it's significantly more than the 3.6% she was paying on the $3,500 loan.

Best Policy: Before you consolidate your student loans, crunch the numbers. Consider how much longer it will take to repay the new loan and how much more in total interest you will have to pay as a result. Weigh that against the benefit of a lower interest rate, smaller monthly payments and having just one—not multiple—student loan payments to handle each month.

Loan Consolidation Caution: Don't Mix Federal and Private Loans

As mentioned earlier, if you have both federal student loans and private student loans, you should consolidate them separately, not together.

Private student loans lack certain protections. Combining them with federal loans will disqualify you from applying for the benefits provided for federal student loans, such as to extending the loan-payment period , income-driven repayment plans, and federal loan forgiveness programs.

That would give you two loan payments per month, which is still simpler than four or five or more of them. And that's before you go to grad school...

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