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What is Student Loan Consolidation?

Student Loan Consolidation is basically the process of taking all your current student loans and merging them into a single loan with one lender. All you various loan payments are consolidated into a single payment. Student loan consolidation is a form of debt consolidation and is similar in practice to say refinancing a home mortgage loan.

Why Do I need Student Loan Consolidation?

A large majority of students use student loans to fund their education which otherwise would not have been possible due to financial circumstances. Student loans provide them with the funds to attain education that can get them into a well paying job. Repayments on your student loans begin once you leave college and start work. Until then most student loans are in deferment. Unfortunately when you start working, many students find it difficult to meet the required monthly payments for the many student loans debt that they took upon themselves. This is where consolidation comes in handy.

What are the benefits of student loan consolidation?

Loan consolidation has many advantages and benefits. Each student’s situation is different but generally speaking loan consolidation should help you to

• Move to a lower rate of interest for the term of your loan.
• Reduce your monthly payments
• Combine all your payments into a single payment

There are many more reasons. Read about the various reasons in this article about the advantages of student loan consolidation.

When Should I go for a student loan consolidation?

Again broadly speaking, student loan consolidation makes sense if the interest rate on your consolidated student loan is lower than the rate of interest on your current loans. Additionally if you find that managing several loans is becoming a hassle and would like to consolidate into a more manageable single payment. A third reason could be that you are planning on going back to school and would like to consolidate and defer your loans till the time you are done with school. Each reason is situation specific, you have to make sure your reasons are sound.

How is the interest rate calculated while consolidating my student loan?

Interest rate on a consolidated student loan is calculated by averaging the interest rate for all your current loans. This is then rounded off to the next 1/8th of 1%. That said, the maximum interest rate that can be applied on a consolidated student loan is 8.25%. Use this calculator to figure out how much you will save

Can I save a lot if I consolidate my loans?

This is again very situational and depends from individual to individual. The main factor is the current interest rates on your student loans. If you have a high interest rate then yes, you will save money. Keep in mind though simply lowering interest rates in not enough. You can lower interest rates but if your loan term is increased, though you will be paying lower monthly payments, you will end up paying much more since you now will be paying for a longer period of time.

Am I eligible for Student Loan consolidation?

To be eligible for loan consolidation, you have to meet the following requirement.

• You have currently started repayment on your student loans or you are in the 6 month deferment period after graduation
• Your current student loans total more than $7500
• You have student loans with more than one lender
• You have not consolidated your student loans. If you have consolidated your student loans already, you only become eligible to further consolidation if you have gone back to school and taken on more debt.

What kinds of student loans can be consolidated

The following types of loans can be consolidated:

• Direct Subsidized loans
• Direct Unsubsidized loans
• Federal Subsidized loans (Stafford Loans)
• Federal Unsubsidized loans
• PLUS loans
• Federal and private consolidation loans
• Health education assistance loans
• Health professions student loans
• Disadvantaged student loans
• Nursing student loans
• Defense student loans
• Direct student loans
• Federal insured student loans
• Auxiliary student loans

Where can I consolidate my loan?

You can consolidate your student loans directly with the US Department of Education or with private lenders such as banks or credit unions that are part of the Federal family education loan program.

When should I consolidate my student loans?

You can consolidate your student loans once you’ve started making monthly payments on your loans or during the 6 month grace period. The best time to consolidate would be during the 6 month grace period since you might haggle a better rate of interest. Do keep in mind however that you will lose any remaining time in your grace period if you go in for consolidation. One way around this is to wait till your 6 month grace period is almost over and then consolidate your student loan.

Consolidating your private student loans or any student loans for that matter can make financial sense if you get a better rate of interest and your term of the loan remains unchanged or better is reduced. This is a crucial factor in deciding if consolidating your loans is worth it and if it makes financial sense.

If however your consolidating company offers to lower your monthly payments but increase your repayment term then purely from a financial perspective this does not make it a good deal for you. You don’t know have to know much about loans to understand what this means – the longer you stretch your repayment, the more interest you pay on your loan.

For the sake of argument, let’s assume that you are hoping to consolidate $30,000 of private loans that will enter a 10-year repayment at 8.9% interest. Right now, you would be looking at 120 payments of $378.41 a month. Consolidate that $30,000 into a 20-year loan at the same interest rate, and your payment drops to $267.99 a month – a savings of $110.42 a month. I’m sure you could put that extra $110 to good use.

But here’s the catch – over 10 years, your total payments will be $45,408.36. How’s that compare to 20 years, where your total payments will be $64,318.53?

What’s the privilege of cutting your monthly payment by $110 going to cost you? $19,000. Wow, that’s the list price on a Honda Civic, a Mini or a Pontiac G5.

Make that same deal on your government loans, and you’re looking at another $15,000 in extra interest. That’s quite a lot to pay. Before you consider consolidation, take a look at your lender’s other options, including Income Contingent Repayment, extended repayment, graduated repayment, and the brand new Income-Based Repayment. Do the math, and see which of these might make the most sense for you.

Don’t be in a hurry to consolidate or consolidate for the sake of it, there are several options available to you and unless you do your due diligence, it will prove to be a very costly decision.