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How To Consolidate Your Student Loans

By David Bakke

When it comes to student loans, the landscape has certainly changed. Lenders who used to be major players in the game have disappeared, and the rules governing consolidation aren’t the same anymore. Is consolidation right for you? The answer may not be as easy as it seems, but hopefully we can help you navigate those waters. The average student loan debt in this country is right around $23,000, and only about 19% of 2009 college graduates are employed at their time of graduation.

What Does Student Loan Consolidation Mean?

Student loan consolidation basically means combining multiple student loans into one. You can even consolidate one student loan if you so desire. The benefit of loan consolidation is that instead of making multiple monthly payments, that payment will be consolidated into one, and the payment should be significantly lower. So, you would think that student loan consolidation is a no-brainer, right? Well, it’s a little more complicated than that.

Qualifications

First, there is a short list of requirements that you need to meet to qualify for student loan consolidation.

  • You can no longer be “enrolled” in school. This means no longer taking classes, or less than half-time (usually six hours per semester, depending on your school).
  • You need to be actively re-paying your student loans, or if not, they need to still be in their “grace” period. This is the several months following graduation.
  • For the most part, you need to have at least $10,000 in student loans.

Federal and Private

There is also the distinction between the types of loans that you have. There are federal student loans and private student loans. The differences are important.

If you have both, you should never consolidate federal and private loans together. They’re separate animals, so to speak, and you just shouldn’t try to combine them. And in general, consolidating private loans can be tough, and may not even make sense. There are really only about four lenders left who are actively participating in private student loans. If you decide to consolidate, keep in mind that the lender sets the rate and that your credit score will play a role in determining this rate. This is not the case with federal loan consolidation. Check out every single detail and every bit of fine print before moving forward, and also keep in mind that many times there are additional fees involved in consolidating private student loans.

Advantages

There are however, many benefits to consolidating your federal student loans. You will only be making one monthly payment to one financial institution. And you should be able to decrease your monthly payment. With federal student loan consolidation, your interest rate will never be higher than 8.25%. And it will be a fixed interest rate. You may also be able to extend your repayment period if you so desire. A lot of lenders offer life-of-loan servicing as well, which means they agree never to sell your loan. And, in some limited cases, you may qualify for additional borrower benefits, such as auto-debit payment reduction, and consecutive on-time payment reduction.

Disadvantages

There are other things to consider before going with consolidation. If you decide to “stretch out” your repayment period, you may end up paying more in interest for your loan depending how long it takes you to pay if all off (despite the potential lower interest rate). And, although I just said that consolidation may qualify you for certain benefits, many benefits may disappear. Usually, there is no grace period involving consolidated loans, and deferment may not be an option. Certain rebates may not apply to you as well. As with anything, it is important to read the fine print and ask the right questions before moving forward. Keep in mind, too, that if you decide to consolidate, once it is completed, it cannot be reversed.

The Process

I may be oversimplifying the process a bit, but here are the steps to go about consolidating your loan.

  • Gather ALL documents. This includes all loan records, account statements and bills.
  • Calculate your potential consolidation rates with an online calculator.
  • Contact existing lenders to discuss consolidation and obtain offers.
  • Compare.

My Thoughts

First, if you have private student loans, I may not even bother. You can look into it, but it may not even be an option considering most lenders are not even in that game anymore, and it simply may not make sense to do so.

Second, one of the most important advantages I found with consolidating is the ability to convert to a fixed-rate loan. If your loans currently have variable interest rates, I’d definitely look into consolidating them.

Also, this may seem hard to swallow, but I would only consider consolidating your student loans if you’re looking for a long-term solution to your finances. If you are only looking for short-term relief from your student loans, you may want to consider toughing it out or exploring other options. The repayment period of most student loans is long enough; I’d be careful before extending it any longer.

If you’ve graduated in the last six months, then consolidation may be perfect for you. During this time, your odds of getting a lower interest rate are probably higher and most lenders won’t force you right into re-payment.

Finally, never ever pay a fee to consolidate your federal loans. Once you’ve done your homework and made your decision, simply go to FinAid to begin the process. As usual, there are a thousand sites out there that will try to convince you to give them your money to do this, but the process is 100% free.

I hope you found this helpful and informative, and I wish you luck in your decision.

(photo credit: alla2)

David Bakke
David started his own personal finance blog, YourFinances101, in June of 2009 and published his first book on ways to save more and spend less called "Don't Be A Mule..." Since then he has been a regular contributor for Money Crashers. He lives just outside Atlanta, GA and most all of his free time is taken up by his amazing three year old son, Nicholas.

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