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Consolidating student loans entails taking out a new loan to pay off existing loans. It sounds simple, but there are a few things to keep in mind.

Usually, you’re eligible to consolidate if you are:

  • Not in school, or enrolled less than part-time
  • Making loan payments, or within the grace period
  • Have a good repayment history
  • Owe at least $5,000

You cannot consolidate private and federal student loans, and you can only consolidate loans in your name. Each lender requires a minimum loan balance, unless you are consolidating under the Federal Direct Consolidation program.

The advantages of consolidation include streamlining your bill payments, extending your repayment term and lowering your interest rate and monthly payment.

Disadvantages include paying more in total interest, having a larger loan to repay, paying longer on an extended loan, losing borrower benefits from current lenders, facing a possible prepayment penalty, and the loss of a grace period.

Watch out for fraudulent lenders who promise to drastically lower your interest rate. Legitimate lenders weigh the average of the interest rates you’re paying on your existing federal student loans and then round that number up to the nearest one-eighth of a percent. Your consolidated loan may have a lower rate than the highest rate on your existing student loans, but it will be higher than the lowest rate of your existing loans.

Beware of any upfront fees a lender demands, and of anyone who says you must choose another repayment plan if you have a Perkins, Stafford or PLUS federal loan.

In short, when considering a consolidation, always evaluate the interest rate and interest cost, prepayment penalties, borrower benefits, your financial capabilities, and the time it will take to repay the loan.

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