Consolidate My Student Loan: Is it the Answer to Financial Woes?

According to a recent article in the New York Times, many lending institutions are cutting back their participation in the federal student loan program. Once highly lucrative, federal student loans have become less profitable and consequently less popular with lending institutions as a result of recent legislative changes that reduce lender federal subsidies. With some of the nation's lenders declining to make federal loans to students attending certain types of institutions that lenders deem 'less-selective,' students who already have loans with one lending institution may have to borrow from a different lender. Consequently, more borrowers may be turning to loan consolidation to manage multiple payments to multiple lenders.

Is Consolidation the Answer?

It depends. Look at the following pros and cons when considering loan consolidation:

Pros: Consider consolidation if:

• You make multiple monthly payments to different lenders and are looking for one monthly payment and/or a lower monthly payment
• Your monthly payment amount is unreasonably high when compared to your income

A consolidation loan can afford you additional benefits including a lower interest rate on some loans, access to flexible repayment plans, and different deferment and forbearance options.

Cons: Consolidation may not be the answer if:

• You only have a few payments left

If your loan is close to being repaid, consolidation may not be a good idea. The consolidation loan would lower your payments but would also extend the loan repayment period, thereby increasing your repayment by the extra interest you pay.

Do your Research and Consolidate with Caution

Consolidation can be a welcome answer to your financial problems but it's not a "one size fits all" solution. Before you begin the consolidation loan process, it's a good idea to consider all options and be fully aware of how your decision to obtain a consolidation loan impacts your long-term financial plan.

Consolidation loans most often include education loans obtained through the Federal Family Education Loan (FFEL) or the Direct Loan Programs as well as federal Perkins Loans and some health profession loan programs. Consolidation loans are offered by the federal government and by lending institutions. If you've made the decision to obtain a consolidation loan:

• Talk with a financial aid office representative about deferment and forbearance options
• Visit the Direct Consolidation Loan website, which has consolidation information and FAQs, as well as an online consolidation loan payment calculator
• Contact lending institutions and find out what they offer in consolidation loan benefits
• Compare the information from all sources

By shopping around and getting the consolidation loan deal that is most advantageous, you're on the road to sound financial planning. A consolidation loan can be the answer to your loan repayment woes but do your research and make sure you are fully informed before you consolidate.

Sources

• Direct Consolidation Loans
• SmartMoney, Consolidating Student Loans Not Always Best Option, by AnnaMaria Andriotis
• The New York Times, Student Loans Start to Bypass 2-Year Colleges, by Jonathan D. Glater

About the Author:
Judi Sandall is a graduate of the State University of New York, with a BA in English Literature. She is a technical writer and editor who worked in student financial aid for over 20 years.