By David Pilley on September 27, 2011
.jpg.aspx?width=75&height=75) Student loan consolidation is a good option for recent graduates who have a multitude of federal student loans. If you consolidate your loans, your repayment schedule will be extended so you can have smaller monthly payments. A typical student loan has a 10-year repayment plan, but a consolidated plan may last longer than 10 years, up to 30 years. Unless you take on new student loans in the future while trying to get a master’s or doctorate degree, you can consolidate just once. Therefore, you need to understand the dos and don’ts of consolidating your student loans.
First, you will not be able to consolidate federal loans and private loans. There are different guidelines for consolidating both types, and you should be more focused on consolidating your federal loans. With any private loans, you need to be in contact with the person or people who administered them because they might all have different terms.
There is usually a minimum amount eligible for consolidation. The majority of lenders will not consider consolidation unless you have at least $7500 worth of federal loans. Some might consider $5000, but since repayment plans of unconsolidated loans last a maximum of 10 years, they figure you can handle the monthly payments if you received just a few thousand dollars in federal funding.
Always check with your original lender before doing anything. While you can get a consolidation loan from anyone, your original lender has all the paperwork, and he/she may offer better loan discounts than a different lender.
Do not pay any processing or upfront fees. Debt consolidation of your federal student loans is free, and it IS a scam if someone is trying to make you pay before you start repaying your debt.
Do not try to consolidate if you have already paid off the majority of your loans. The main reasons of consolidating student loans are to extend the time period or to save on interest payments. You won’t reap any benefits if you have handled your student debt well for the past few years and then decide to change the terms. The best time to consolidate your student loans is during the grace period or during the first year of making repayments.
Finally, do try to look for lower interest rates, but know that this is not always possible. Consolidating student loans will be a benefit to you if you have a mix of loans. The interest rate on a consolidation loan is the weighted average of each loan’s individual interest rate (rounded up to the nearest eighth and capped at 8.25%), so pay attention to which types of loans you have. PLUS loans have a fixed rate of 8.5%, so consolidating these would drop the interest rate by a quarter of a percent to 8.25%. Unsubsidized Stafford Loans, on the other hand, currently have a fixed rate of 6.8%. You would not gain any benefit interest-wise if you consolidate these, as the rate would actually go up to 6.875% (rounded up to the nearest eighth). Perkins Loans have a 5% interest rate, so having a combination of all three may result in savings, depending on the weighted average. For example, consolidating $10000 worth of Perkins Loans (5% interest) and $10000 worth of unsubsidized Stafford Loans (6.8% interest) would result in a $20000 consolidation loan with an interest rate of 6%.
As it is now September, many grace periods are under way, and some may have already expired. Please consider this information before you decide to consolidate your student loans.
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