Consolidating Student Loans
What is Student Loan Consolidation?
Student loan consolidation is a process where you take your existing student loans and combine them into one single loan, a master loan if you want to call it and in the process significantly reducing your monthly loan payments. There are wide variations on how much you can save by consolidating your loans and is completely dependent on each individual’s situation, students loans, rate of interest of the loans, variable or fixed student loans and so on.
Student Loan Consolidation Types
There are basically two types of student loan consolidation programs. One offered by the government or Federal Student Loan Consolidations program and the other offered by private financial institutions such as banks called as Private Student Loan Consolidation.
Why Consolidate My Student Loans?
Student loan consolidation offers tremendous benefits to a borrower. Imagine by consolidating your loans you can reduce your monthly payments up to 50% in some cases. You have the opportunity to significantly reduce your monthly payment outflow and reduce your overall interest payments on your loan. Apart from reducing your payments, consolidating your loans will also reduce and simplify your payments. Imagine have to deal with one lender rather than a bunch of lenders.
Can I Consolidate Student Loans taken by two different people?
A very common questions asking if one person can combine or consolidate their student loan with their wife or husband. Unfortunately you now can no longer consolidate yours and your spouses student loans anymore. There are many reasons but the main four reasons why it is impractical to for spousal student loan consolidation is Divorce, Death, Disability and Deferment.
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Spousal consolidation used to be allowed but the law allowing it was repealed for some very good reasons which we sometimes call the "5 Ds" of Spousal Consolidation. These 5 are…
Deferment, Disability, Death, Divorce… DON’T
Essentially, in a spousal consolidation, both partners take responsibility for the full amount of each persons’ loans. So, you own all your loans PLUS his and he, in turn, owns all of his loans PLUS yours. Both loans are now in both persons’ names (and on both credit reports). This means that, in order to qualify for a benefit (deferment, loan forgiveness, etc.) you both have to be eligible for the benefit before it can be granted. To elaborate:
Deferment:
– In-School Deferment: A borrower is normally eligible for in-school deferment any time s/he goes back to school at least half-time. But, if your consolidate your loans with your husband’s, your loans are only eligible for deferment if he, too, returns to school!
– Economic Hardship Deferment: Normally, if you as a solo borrower ever had trouble repaying your student loan debt, you can get your loans deferred by showing your lender that your payments exceed a certain percentage of your income. However, if you consolidate your loans with your husband’s, you would BOTH need to qualify for this deferment.
– Unemployment Deferment: Normally, if you lost your job and couldn’t handle the monthly loan payments, you would be eligible for this deferment; however, if your loans are consolidated together, he would probably have to lose his job, too, before you qualify.
Disability: This is a big one. Loans in your name can be forgiven (i.e. written off, canceled) if you become totally and permanently disabled. But, since Spousal Consolidation loans would be in BOTH of your names, both borrowers (you and your husband) would have to become disabled in order to qualify. If you alone became disabled, he would be 100% responsible for repaying your debt.
Death: Same thing as disability. If a borrower dies, his/her loans are canceled. But if those loans are consolidated with a spouse’s, they are sort of "co-owned" and therefore they become the burden of the surviving spouse. Not a very nice legacy.
Divorce: IF this ever happened to you, what a huge mess it would be! Since you can’t unconsolidate, you would be stuck, (even in divorce/separation) with this jointly-owned debt. Even if, in the divorce settlement, you made plans for one of you to take charge of the debt, you would still be at that person’s mercy when it comes to repayment. If they didn’t pay, the default would appear on your credit report.
Now, you are welcome to consolidate your loans on your own. Federal Consolidation Loan interest rates are set by the federal government based on the current rates. At present, the Stafford Loan interest rate is fixed at 6.8%; Perkins loans are at 5% and have been for a looong time. If you are consolidating a variety of loans, the rate you receive will be a *weighted average* of all your loans’ rates: so, if you have twice as much Stafford debt as Perkins debt, the rate would be somewhere in between 6.8% and 5% but more weighted towards the Stafford Loan rate.
The only difference that you’ll really see in interest rates will come from the various incentives ("borrower benefits") that different lenders will inevitably offer you in order to get you to consolidate with them. Sallie Mae is the largest consolidation lender that exists today. Citibank is the #2 lender — also a fine choice. Nelnet is pretty good, too. All three have been around for a while and have made a name for themselves. When choosing a consolidation lender, benefits are important, yes, but it’s also important to select a lender that’s been around a while and has proven itself in the market. If you pick a "no-name" lender because their benefits sound good, make sure you ask yourself (and them), "What happens if you go out of business and my loan gets sold to another lender? THEN what happens to my benefit?"
Spousal consolidation is no longer allowed, and your interest rate will be calculated using the same formula (defined by the government) regardless of whom you consolidate with. However, many lenders offer interest-rate reductions for paying on time or via direct debit. It is important to read the fine print and understand how you become qualified for or disqualified for a lender’s borrower benefits programs. Beyond savings, borrowers should consider customer service, flexible repayment options, online account access and applications, reputation and industry experience when selecting a lender.
Yes, it is called spousal consolidation. However, some consolidating companies, i.e. Nelnet, will no longer combines spousal loans.
Check out companies like Student Loan Xpress or the Student Assistance Foundation. These companies allow spouses to consolidate your loans. Perhaps even Sallie Mae. My interest rate is 4.25%, actually it’s 4% because I have the loan automatically deducted from my account every month now. However I consolidated before July 1, 2006. So rates probably have gone up. The cap for student loan interest rates is 8% but that’s pretty high when you’re talking thousands of dollars. Shoot for the 5% or lower range when searching for your consolidation.
You can consolidate while you are in-school. Some lenders allow you to keep your grace period after leaving school, others do not.
The consolidation of loans allows you to lock the current interest rate in, otherwise the rate will continue to fluctuate as the economy does.Repayment will also allow you to extend your repayment out longer than 10 years, lowering your monthly payment. Because of the large jump in interest rates it is highly recommend that students consolidate their loans by the end of the day today.
The Perkins loan may also be consolidated, it has a fixed (or locked-in) interest rate of 5%. So many students will opt to leave that loan out of the consolidation if the are still in-school so their interest rate isn’t made higher in the weighted average of loans and their interest rates during the consolidation process.
You may also want to consider this if you are in education or nursing fields: When you consolidate a student loan you no longer qualify for the Teacher Loan forgiveness or Nursing Loan forgiveness programs. So yes this a drawback. It would be a good idea to calculate your interest savings of consolidation for the 5 years you are required to work & pay on your loan to qualify for the program versus taking what portion of your loans that will be left at that time that will qualify for the loan forgiveness.
To find a listing of all your loans you can use the National Student Loan Database http://www.nslds.ed.gov. You will need to know your Dept of Ed PIN to access this info. To retrieve your PIN you can request a duplicate be emailed to you within 4 hours at http://www.pin.ed.gov
You do have the choice of choosing another lender to consolidate with and their are many to choose from. And it is typically easiest to go with your current lender.
Many people on this site are recommending Direct loans. They are reputiable but many other are as well. To consolidate with Direct Loans you can call their phone number 1-800-557-7392 or complete an application on their website http://www.loanconsolidation.ed.gov. To consolidate at the website you will need your Dept of Education PIN and the amounts borrowed for each loan (and whether they are subsidized or unsubsidized). The PIN can be emailed within 4 hours so if you request it now you can still get your application completed (www.pin.ed.gov).
There are some major changes going on in the student loan market currently due to the economy and credit crisis. Many FFELP lenders such as NELNET are getting out of the business. Almost all that I am aware of are suspending consolidation as there is no profit in it at all.
However, you can still apply for a consolidation either through a willing FFELP loan consolidator or the more likely case – the government’s Direct Lending Program. Direct Lending will be around regardless.
Now whether you should consolidate or not is another question. If you have variable rate Stafford loans then you should wait until after July 1st to consolidate them. It is expected that the 91 T-bill rate will fall 2-3 percent and the Stafford variable rates are set each July 1st for the remainder of the fiscal year. Any Stafford loans you took out after July 1, 2006 were issued as fixed rate, not variable and the interest rate is set at 6.8%.
Consolidations are done on a weighted average of all loans so you may want to consider only consolidating variable rate loans in the new consolidation and leave any fixed rate aside and with their current lender.
All of this advice is based on federal loans – not private.
Hope this helps.
MK:
A few things you need to know about consolidating student loans:
1. Consolidation simply means taking several loans, ripping them up, and replacing them all with a single new loan. The new loan will have new terms and conditions, and the new loan can be arranged with a new lender.
2. Government loans (Stafford, PLUS, Perkins) can NOT be combined with non-government (private) loans in the same consolidation.
3. Government loans can be fairly readily consolidated through the Department of Education’s Direct Consolidation loan program.
4. The Direct Consolidation loan program will NOT consolidate private loans, and you will NOT be able to find any other legitimate lender who is consolidating private loans at the present time.
5. Consolidation loans are sold with the claim that there are 2 major benefits – one is not much of a benefit, and the other is a legitimate benefit.
The advantage of having to make "JUST ONE LOAN PAYMENT A MONTH!!!" is no big deal, and no one should consolidate to gain this wonderful advantage.
The other, legitimate claim, is that a consolidation will cut your monthly payment obligation.
6. Cutting your monthly payment obligation comes at a tremendous financial cost.
There is no mumbo jumbo, secret, too hard for the average person to understand trick to cutting your monthly payment obligation. Consolidation loans cut your monthly obligation by stretching the repayment over a much longer period of time. If you know ANYTHING about how loans work, you should know what that means…..
MUCH MORE INTEREST.
$40,000 in Stafford borrowing, repaid over 10 years requires 120 monthly payments of $460.32, and a total repayment of $55,238.63
$40,000 in Stafford borrowing, repaid over 20 years requires 240 payments of $303.34, a total payment of $73,279.47.
Yes, indeed, that consolidation will save you $157 a month.
Yes, indeed, that consolidation will cost you an extra $18,000.
$18,000 is the cost of a new car, it’s a couple of vacations to Europe, or the downpayment on a condo. Or it could be the extra interest you pay for the privilege of saving $157 a month.
Consolidation loans may be an excellent financial strategy for some people, but make sure that you do the math. Most people considering consolidation loans are only doing it because they’ve now realized that they might have over-borrowed. Don’t compound the problem by taking on far more debt, without realizing what the cost of that "solution" will be.
Good luck to you – I hope this helps.