Student Loan Consolidation

Ask a young college student and they’re likely to tell you that they never considered how they would repay their student loans until graduation rolled around. Then it hit them. They have five or more student loans and no source of income.

Fortunately, repayment typically doesn’t start until about six months after graduation. So it gives you some time to consolidate your student loans into a single payment.

Student Loan Consolidation Options

The type of loans you use to attend college will affect your options when it comes to student loan consolidation. However, if you’re like many college students you likely have a couple of federal government loans and perhaps others that are from private lenders.

Whatever combination of outstanding student loans you have, there are specific factors you should know about student loan consolidation:

  • You cannot consolidate federal and private loans together
  • Effective 2006, federal student loans carry fixed interest rates instead of variable interest rates
  • You can consolidate most federal students loans such as Stafford, PLUS and Perkins
  • Federal loans offer borrower protections that private loans don’t offer
  • Federal loans generally have lower interest rates than private loans
  • You can consolidate a consolidation loan only once
  • A consolidation loan may decrease the monthly payment without extending the overall loan term beyond 10 years
  • There is no prepayment penalty on consolidated federal student loans

Warning! Don’t consolidate your federal loans through a private lender. Otherwise, they are not eligible for relief under the Student Loan Forgiveness Act or any other current federal relief programs

When it comes to private student loans, the private lender dictates the terms and interest rates, not the government. Be sure to shop around if you want to consolidate your private college loans. There are several sources for private student loan consolidation, each offering differing terms. Whichever you use, make sure to ask about:

  • Fees
  • Charges
  • Prepayment penalties
  • Total debt cap
  • Maximum interest rates
  • Life of the loan

Benefits of Obtaining a Consolidation Loan

If you can afford to continue to make your monthly payments on your student loans, you might want to consider doing so. The only reasons for seeking a consolidation loan are because:

  • You want one easy monthly payment
  • You can get a lower interest rate
  • You’re in default
  • You want your Federal Family Education Loans (FFEL) to be eligible for Public Service Loan Forgiveness

Keep in mind that while consolidating your student loans may help lower your monthly payments, you typically add a few thousand dollars of interest onto your total loan.

Access to Alternative Repayment Plans

Since July 2006, the federal government has offered graduates a new “income-based” repayment (IBR) plan. To qualify, you must have a partial financial hardship. That is, your monthly payment under a 10-year Standard Repayment Plan is higher than if you had an IBR.

Only certain loans qualify for an IBR and your monthly payment will be:

  • Based on your income and family size and capped at the 10-year standard repayment amount;
  • Adjusted each year, based on changes to your annual income and family size;
  • Usually lower than they are under other plans; and
  • Paid over a period of 25 years.

The benefits of an IBR include:

  • Repayment based on your earnings. Your payment is no more than 15% of your discretionary income.
  • Interest payment benefit. Your IBR payment must cover the interest on your Direct Subsidized or Subsidized Federal Stafford loan or the government pays it for up to three consecutive years.
  • Capitalized interest. Accrued interest not covered by your loan payments is not capitalized (process of adding interest charges to your existing loan balance).
  • 25-year cancellation. Repay your IBR plan for 25 years and meet certain other requirements, and you may be able to cancel the balance.
  • Public service loan forgiveness. If you make 120 on-time full monthly payments while working full-time for a public service organization, you may be eligible to receive forgiveness for the balance.

For more information about consolidating federal student loans, visit the federal direct consolidation loan website.


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