College Student Loan Consolidation

Upon graduating from college, most students have some type of student loan debt, while many have multiple loans that must be repaid. Whether your loans are federal loans that have been disbursed by the government or private loans from private lenders, student loan consolidation might be a wise option for you.

It is important to recognize right off the bat that while both types of student loans may be consolidated, it never is a good idea to consolidate them together. Federal loans provide borrowers with many benefits that would be lost if they were to be consolidated with private loans, so it is important to consider consolidation separately for both federal and private loans.

Federal Student Loan Consolidation

There are three main reasons why borrowers primarily choose to consolidate their federal loans: (1) to lock-in an interest rate, (2) to simplify one’s finances, and (3) to lower monthly payments.

1. Consolidating one’s federal loans results in a single fixed interest rate that is guaranteed for the life of the loan. Borrowers do not need to worry about their rate fluctuating with the market. The interest rate on one’s consolidation loan is determined by calculating the weighted rates of the loans that are included in the consolidation.
2. Once your federal student loans are consolidated, you only will need to make to make a single payment to a single lender each month. It is much easier to remember to make payments on time when the process is simplified than when you must balance multiple payments.
3. Through consolidation, you have the opportunity to spread your payments out over a longer period of time. Consequently, your monthly payments will be smaller.
   

All federal student loans are eligible for consolidation, and all borrowers may choose to take such action their loans are in their grace periods or in repayment. There is no minimum balance that is needed for eligibility. Consolidation does not require employment, property for collateral, or a co-signer. Applying for consolidation is free, and borrowers do not have to face credit checks.

Consolidation will take about 30 to 60 days to go into affect, at which time repayment will begin. You may choose any of four payment options: standard, graduated (payments increase gradually), income-contingent (payments are based on annual income), or extended (payments stretch over a longer period).

Federal consolidation loans provide borrowers with many of the same benefits as the individual federal loans, including the ability to defer or forbear payment, to claim interest as a tax deduction, and to apply for loan forgiveness in special circumstances.
There are a few additional things that you should consider before you decide to consolidate your federal student loans:

• You can only consolidate once without the inclusion of an additional loan or loans, so make sure that you choose the opportune time to do so.

• You can never “unconsolidate” your student loans.

• Consolidating during your grace period will base your interest rate on the rates as they were when you were in school. In other words, your rate will be lower than it would be if you waited to consolidate until repayment.

• Consolidating your loans requires that you forfeit any benefits that are associated with an individual loan. Weigh the costs of consolidation with the benefits.

• You may consolidate your loans with any lender, but Federal Direct Loan Consolidation is a popular and reputable source.

• There is no prepayment penalty on your federal loans, and any payment that goes above and beyond the monthly amount is interest-free. Use this to your advantage!

If you have both federal and private student loans that you would like to consolidate, then you should consolidate the federal loans first. Doing so reduces the amount of open accounts that you have on your credit report, which will boost your credit score. This, in turn, can help you to obtain a better rate on your private consolidation loan.


Private Student Loan Consolidation

The main benefit of consolidating one’s private student loans is the simplification of finances; it can be a huge hassle to remember to make multiple payments to multiple lenders each month. You also may be able to obtain a fixed interest rate and likely can improve your credit score by having fewer accounts open.

Private consolidation loans are a bit more difficult to obtain than federal consolidation loans. In order to be eligible, one must be a U.S. citizen, pass a credit check, and sometimes pay a small application fee. Every lender will have slightly different requirements.

Because their terms and conditions vary so much more than federal student loans, it is difficult to make concrete recommendations regarding private student loan consolidation. Whether or not consolidating is right for you truly depends on your personal situation and the nature of your loans. However, there are several things that everyone interested in private loan consolidation should consider:

• Understand that you will forfeit any benefits of your individual loans if you choose to consolidate, so weigh the costs and benefits of consolidation carefully.

• The benefits associated with federal student loan consolidation do not necessarily apply to private consolidation loans. For example, some lenders may extend a variable interest rate to you instead of one that is fixed. If you are offered a fixed rate, it likely may be higher than you were hoping.

• Be certain about your motivations for seeking a private consolidation loan. Because private loans vary so much from lender to lender, not every consolidation loan will be a good match for your purposes.

• You can only consolidate once without the inclusion of an additional loan or loans, so make sure that you choose the opportune time to do so.

• You can never “unconsolidate” your student loans.

• Your current loan holder might be a good source for your consolidation loan, because you will save time (and possibly money) on paperwork. However, make sure to at least consider other lenders so that you attain the best possible deal.