How to Consolidate Student Loans

• By Tracy
• Also try: How to Reduce Student Loan Debt

Introduction

• Consolidating your student loans generally means one lender will group together your various loans and lock them in at a new, fixed rate. Many people who consolidate their loans appreciate having only one bill to pay every month as well as the knowledge that their rates won't change over time. Consolidation can also lower your monthly payment because it may extend the term of your loan (which also means likely paying more interest over time). But consolidating your loans doesn't make sense for everyone. Continue reading to determine if consolidation is beneficial to you and how to embark on the process.

Step 1: Decide Whether to Consolidate

If everything adds up, go ahead and consolidate. (Creative Commons photo by CJ Sorg)

• There are pros and cons to consolidating depending on your particular situation. Before you rush to consolidate, consider the factors below.

1. Consolidating your loans at a fixed rate means that if rates go up, yours will stay put. Alternatively, if there is a sharp dip in interest rates, you will still be paying the same fixed rate. So if you think rates will plummet, it might be best to wait things out.
2. Make sure your loans can be consolidated: consolidation loans are available for most federal loans, including FFELP loans (which include Stafford, PLUS, and SLS loans), FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans and Direct loans.
3. There are also private consolidation options available for private student loans. See Step 3: Consolidate Private Loans.
4. To better understand the ins and outs of consolidation, see Simple Tuition's Guide to Student Loan Consolidation. (Note: The link will open as a PDF file.)
5. Note that you might pay more overall when you consolidate because you are extending the life of the loan (even if monthly payments are lower).
6. Do note, however, that the interest you pay on your student loans is tax deductible.
7. Evaluate the pros and cons of consolidation with your particular loans in mind.
8. Calculate what your consolidated rate would be to determine if it's worth consolidating.
9. You'll also need to decide if consolidating all your loans is a good idea, or if you should just consolidate some of them. Because your rate is determined as an average of your current rates, you may want to keep a higher rate loan out of the equation. Calculate your rate without including some high interest loans to decide if you should consolidate all or some of them.

Step 2: Consolidate Your Federal Loans

What you save on monthly payments could add up. (Creative Commons photo by Nic McPhee)

• Consolidating your federal loans means you will pay one monthly bill and will determine a fixed rate for the life of your loan. This rate is generally lower than that of a private consolidation offer.

1. To determine your consolidation rate for your federal loans, a lender will calculate a weighted average of your current loan rates and then round up to the nearest 1/8, but not to exceed 8.25%.
2. Calculate your potential consolidation rates using FinAid's consolidation calculator.
3. Your interest rate also depends on the type of federal loans you have and when you took them out.
4. You can lock in a lower consolidation rate by consolidating during your grace period (the several months immediately after graduation, during which most lenders will not force you into repayment). Consolidating during your grace period, while ultimately helpful because your interest rate is lower, does force you into immediate repayment, even if you still had a few months left before scheduled payments were to begin.
5. Because Stafford loan holders who graduated in 2007 or after will pay fixed rate interest, it's not as clear that they should consolidate as it has been in the past.
6. Note you cannot consolidate loans if you are currently in school.
7. It is not recommended that borrowers consolidate federal loans into a private loan because you will lose important privileges to defer, apply for a forbearance, or qualify for loan forgiveness under government programs.
8. And under no circumstances should you pay a fee to consolidate your federal loans.

Step 3: Consolidate Your Private Loans

• It is possible to consolidate private loans, as well, and this may be worth doing if your credit score is higher now than it was when you took out the loan.

1. You may be able to consolidate your loan with your original lender. It might be best to start there to see what rates may be available to you.
2. If your lender is not offering a consolidation rate that is appealing, you'll need to comparison shop to find the best consolidation offer.
3. Note that private consolidation loans are based on your credit score, and/or that of your co-signor's. You may get a lower rate if you apply to consolidate with a co-signor who has excellent credit.
4. Be sure to research any associated fees before you determine that it is financially advantageous to consolidate your private loans.

Step 4: Keep Up with Student Loan News

• Keeping up with student loan news if you haven't yet consolidated all your loans will help you determine if it is a good idea going forward.

1. It could be worth checking in with your school's financial aid department to see if they have an opinion on your consolidation plans or recommend a particular lender.
2. Use non-profit Student Loan Borrowers Assistance's list of resources to find information about different lenders or to contact legal or financial advisers who can help you.
3. The New York Times also has a "Times Topic" about student loans that functions like a database of all the current student loan news. Check it regularly to keep up to date on student loan information.
4. FinAid, a site recommended for its financial aid advice, made a recent statement regarding changes in student loans and consolidation:
   • • "A higher minimum balance may be required to consolidate. There may be increases in the interest rates and fees on private student loans."

Resources for How to Consolidate Student Loans

• Federal Student Aid: National Student Loan Data System
• FinAid: Student Loans
• Simple Tuition: Financial Aid and Student Loan Resource Center
• Simple Tuition: Consolidate Private Loans
• Federal Student Aid: Loan Consolidation Information Center
• Student Borrower Assistance: A Resource for Borrowers, their Families and Advocates
• FinAid: Student Loan Consolidation
• FinAid: Loan Calculators
• Federal Direct Consolidation Loans: Online Calculator
• Christian Science Monitor: "Time to Consolidate Student Loans" (May 14, 2007)  
• USA Today: Consolidate Student Loans Only if It's Right for You  
• The New York Times: Times Topics: Student Loans

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