The Facts About Student Loan Consolidation
Student loan consolidation is a lot like refinancing a home loan: all debt is combined into a single loan, often with a single fixed interest rate.
The draw to consolidate student loans is increasing in today’s economy due to rising college tuition costs and the unprecedented amount of student loan debt.
Many students have several student loans with different payment amounts and payments due at different times of the month.
This can become quite a frustrating process as it seems you are always mailing a student loan payment out and your budget may be tight.
However, you should carefully consider the pros and cons of school loan consolidation as it is not always the best approach.
Wouldn't It Be Nice To Have Just One Student Loan Payment?
Banks often encourage people to consolidate student loans by promising “one low easy payment”.
Obviously, having only one student loan bill to pay is simpler than having several.
However, while the idea of consolidating several loan payments into one loan and possibly reducing the overall monthly payment sound good now, in the long run you may add years onto a loan that would otherwise be paid off much sooner than you anticipate.
Federal Student Loans
When it comes to consolidating federal loans into a private loan, it is rarely a good idea as it is extremely unlikely that a private consolidation loan will have better terms than your federal student loans.
In prior years, most federal student loans had variable interest rates, where a private consolidation loan generally locks you into a fixed rate.
Since 2006, all federal student loans have a fixed interest rate so a private consolidation loan does not give you a benefit in this area.
Also, while it may seem beneficial to you at the time because you get a little payment relief, consolidation with a private lender will cause you to lose valuable rights under the federal loan programs.
Lastly, converting federal student loans into private consolidation loans means that all of your federal repayment options, forbearance, deferment, and cancellation rights and privileges are lost forever.
Generally, most Federal Student Loans are eligible for consolidation such as Direct Loans, Stafford loans, PLUS loans, FFEL, Supplemental loans Perkins and Nursing and Health Education loans.
Keep in mind that a PLUS loan made to the parent of a dependent student cannot be transferred to the student in order to apply for a loan consolidation; neither can Private Education loans.
A complete list of all eligible loans and those that are not, is described in your loan application.
Direct Consolidation Loans
There are no application fees for a Direct Consolidation loan, the interest rate is a fixed rate that is generally calculated by computing a weighted average of all loans and rounding up to the nearest 1/8 of 1% with no cap on the interest rate.
Repayment of the loan generally begins within 60 days after the loan is disbursed and your loan provider will let you know when the first payment is due.
Loans have a 10 to 30 year term depending on the amount you are consolidating, your other education debt as well as the repayment plan you select.
Here are some considerations before your rush to consolidate your student loans:
- Not all loans qualify for a Direct Student Loan; ensure yours does before you spend too much time on these other considerations.
- How much longer will you be increasing the repayment period and do you really want to pay be paying on the loan for that additional amount of time?
- Will you be giving up any borrower benefits you have with your current loans?
- Will the new loan have a substantially lower or higher interest rate than your current loan?
- Have you considered looking into the possibility of deferment or forbearance as an option for short term relief?
- Consider that once you consolidate student loans into a Direct Consolidation Loan, they cannot be removed.
Qualifying For Student Loan Consolidation
The current interest rates in today’s marketplace are from 1.97% to as high as 8.5%.
When you apply for a private consolidation loan, your credit is the key in determining the kind of interest rate you’ll receive; if you’re a recent student with poor credit score or a very short credit history, it can be tough to qualify for a good rate without a cosigner who has good credit.
A cosigner guarantees that if you can’t pay back your loan, they will pay it for you.
That makes getting a cosigner a tricky proposition as not only are they potentially agreeing to take on 100% of the loan responsibility if you fail to pay, the loan will also show up on their credit report as they now also have a potential debt on your behalf.
Utilizing a cosigner should be your absolute last resort.
As you weigh the pros and cons, keep in mind that timing is critical. With just a few exceptions, you get only one chance to consolidate with the government loan programs.
Once you have decided that a Student Loan Consolidation is the way you want to go, carefully go through the process and get all of the information you can and be sure that you have no questions.
Know EXACTLY what you are getting into, for how long you are committing to the loan repayment, and what your options may or may not being if the unexpected happens.
StudentLoans.gov is the BEST Student Loan Consolidation resource. Here you will find information to help you to understand, choose and go through the process of Student Loan Consolidation as well as the ability to file the necessary paperwork.
Student Loan Consolidation Resources
- Prior to applying for a Direct Consolidation Loan, if you have questions about consolidating your loans and wish to talk with someone directly, Call the Direct Loan Consolidation Information Center at 1-800-557-7392.
- For Technical Assistance while signed in and completing the Federal Direct Consolidation Loan Application online, select the “Contact Us” tab in the top menu bar of StudentsLoans.gov
- Should you wish to ask a question after you submit your Federal Direct Consolidation Loan Application, contact the consolidation servicer you selected to consolidate your eligible loans.
If you have submitted your application electronically, your servicer’s contact information will be at the end of the electronic process.
If you submitted a paper application, your servicer’s contact information was on the paper application.
- Additional questions or concerns may be directed to the General Student Support Center at 800-557-7394.
||PO Box 82658
Lincoln, NE 68501-2658
|FedLoan Servicing (PHEAA)
||PO Box 69186
Harrisburg, PA 17106-9186
|Great Lakes Educational Loan Services, Inc.
||PO Box 8956
Madison, WI 53708-8956
|Navient (formerly Sallie Mae)
||Attn: EdLoan Consolidation
PO Box 6180
Indianapolis, IN 46206-6180