Student Loan Consolidation – How does it Work?
by Vanessa McHooley
Student loans are a great source of financial aid for students who need help paying
for their education. Unfortunately, students often leave college with burdensome
debt. In addition, they often have multiple loans from different lenders, meaning
they are writing more than one loan repayment check each month. The solution to this
problem is loan consolidation.
What is loan consolidation?
Loan consolidation means
bundling all your student loans into a single loan with one lender and one repayment
plan. You can think of loan consolidation as akin to refinancing a home mortgage.
When you consolidate your student loans, the balances of your existing student loans
are paid off, with the total balance rolling over into one consolidated loan. The end
result is that you have only one student loan to pay on.
Both students and their
parents can consolidate loans.
Should I consolidate my loans? Loan consolidation
offers many benefits:
- Locks in a fixed, usually lower, interest rate for the term
of your loan, potentially saving you thousands of dollars (depending on the interest
rates of your original loans)
- Lowers your monthly payment
- Combines your student
loan payments into one monthly bill In addition, consolidated loans have flexible
repayment options and no fees, charges, or prepayment penalties. There are also no
credit checks or co-signers required.
You should consider consolidating your loans if
the consolidation loan would have a lower interest rate than your current loans,
particularly if you are having trouble making you monthly payments. However, if you
are close to paying off your existing loans, consolidation may not be worth it.
How
will the interest rate for the consolidated loan be? The interest rate for your
consolidated loan is calculated by averaging the interest rate of all the loans being
consolidated and then rounding up to the next one-eighth of one percent. The maximum
interest rate is 8.25 percent.
To figure your interest rate, visit
loanconsolidation.ed.gov for an online calculator that will do the math for you. How
much can I save? How much you save by consolidating loans depends on what interest
rate you get and whether you choose to extend your repayment plan. According to
Sallie Mae, the leading provider of student loans in the United States, consolidating
student loans can reduce monthly payments by up to 54 percent. However, the only way
to reduce your payment this much is to extend your repayment plan. You typically have
10 years to repay student loans, but, depending on the amount you're consolidating,
you can extend your repayment plan all the way up to 30 years. Remember that if you
choose to extend your repayment term, it will take longer to pay off your overall
debt and you'll pay more in interest. There are no preypayment penalties, so you can
always choose to pay off the loan early.
Am I eligible to consolidate my loans? In
order to consolidate your loans, you must meet the following criteria:
- You are in
your six-month grace period following graduation or you have started repaying your
loans
- You have eligible loans totaling over $7,500
- You have more than one lender
- You have not already consolidated your student loans, or since consolidation you
have gone back to school and acquired new student loans
The following types of loans
can be consolidated:
- Direct Subsidized and Unsubsidized Loans
- Federal Subsidized
and Unsubsidized Federal Stafford Loans
- Direct PLUS Loans and Federal PLUS Loans
-
Direct Consolidation Loans and Federal Consolidation Loans
- Guaranteed Student Loans
- Federal Insured Student Loans
- Federal Supplemental Loans for Students
- Auxiliary
Loans to Assist Students
- Federal Perkins Loans
- National Direct Student Loans
-
National Defense Student Loans
- Health Education Assistance Loans
- Health
Professions Student Loans
- Loans for Disadvantaged Students
- Nursing Student Loans
Where can I get a consolidation loan? You can consolidate your loans through any bank
or credit union that participates in the Federal Family Education Loan Program, or
directly from the U.S. Department of Education. The loan terms and conditions are
generally the same, regardless of where you consolidate. You may want to check first
with the lenders that hold your current loans. If all your loans are with one lender,
you must consolidate with that lender. If you decide to consolidate your student
loans, remember that you can only do so once unless you go back to school and take
out more loans. Therefore, you will want to make sure you get the best deal the first
time. The interest rate will be the same from all lenders, but some lenders may offer
future rate discounts for prompt payment and a discount for having monthly payments
directly debited from your account. Can my spouse and I consolidate our loans
together? You can consolidate your loans together, but it is not a good idea for a
couple reasons: - Both of you will always be responsible to repay the loan, even if
you later separate or divorce - If you need to defer payment on the loan, both of you
will have to meet the deferment criteria When should I consolidate my loans? You can
consolidate your loans any time during your six-month grace period or after you have
started repaying your loans. If you consolidate during your grace period, you may be
able to get a lower interest rate. However, since you will lose the rest of the grace
period, it is a good idea to wait until the fifth month of the grace period before
consolidating. The consolidation process usually takes 30-45 days.
Tags: student, loans, plus, loan, consolidation, federal, consolidate, money, for, college, debt, financial, aid, savings, plans, scholarship, search, private, parent,
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