What is Student Loan Consolidation and How It Will Help You
Your college education is a valuable asset that will earn big returns during your career. But the student loans that made school possible have to be repaid. You have the opportunity to consolidate your student debt with a consolidation loan. The only question is: What is student loan consolidation?
- What Is Student Loan Consolidation
- The Federal Student Loan Consolidation Program
- The Benefits of Consolidating Student Loans
- Does Consolidation Lower My Interest Rate
- Do I Have to Consolidate All of My Student Loans?
- How Much Does Student Loan Consolidation Cost?
- How Does Student Loan Consolidation Affect My Income Tax?
- What Are the Disadvantages of Student Loan Consolidation?
- Should a Student Still in School Consolidate a Loan?
- What Kinds of Federal Student Loans Can Be Consolidated?
- What Are the Repayment Options With Student Loan Consolidation?
- What Information Is Required to Consolidate My Student Loan?
- Who Will Consolidate My Student Loans?
What Is Student Loan Consolidation?
Student loan consolidation is a new loan
that replaces your current student loans. Consolidation allows you to combine your student loans into one single debt. Unlike the other loans, consolidation loans have a fixed interest rate for the life of the loan. With a student loan consolidation, you can also choose lower monthly payments and extend the length of the loan.
The Federal Student Loan Consolidation Program
The Federal Loan Consolidation Program covers government-backed student loans
. Private or alternative loans cannot be consolidated through this program. Private student loans account for one-fifth of all student debt. This article refers only to government-backed student loans.
The Benefits of Consolidating Student Loans
- The most important benefit of student loan consolidation is that you get a fixed interest rate on your loan, instead of a variable interest rate. If any of your student loans have a variable interest rate, you should consider student loan consolidation. A fixed interest rate will never change. For a variable interest rate student loan, the interest rate can change each year.
Do you have a student loan with a variable interest rate? The interest rate on it changes each year on July 1. The interest rate on this student loans could go as high as 8.25%. By consolidating this student loan, you lock in your current interest rate so that it doesn’t change over the life of the loan. It is recommended that you consolidate student loans with a variable interest rate.
- The second benefit of student loan consolidation is that you can request lower monthly payments that fit your budget. Your payments can be lower, but, remember, they will continue longer, and you will pay more total interest over the life of the loan.
- The third benefit of student loan consolidation is that you will make only one payment a month, instead of many payments to many lenders.
- Some lenders will offer you a discount on your interest rate when you consolidate your student loan, if your monthly payment is automatically deducted from your bank account. If your payments are on time for 3 years, your interest rate can be a full percentage point lower. This is a valuable perk. Make sure you ask for it when you consolidate.
- In summary, if any of your student loans have a variable interest rate, or if you need to reduce your monthly loan payments, or if you have to make payments every month to many lenders, you should consider student loan consolidation.
Does Consolidation Lower My Interest Rate
Student loan consolidation does not raise or lower the interest rate you are already paying now
. The interest rate on your new loan is computed as the weighted average of your current rates, not to exceed 8.25%. The new interest rate is rounded up to the next 1/8 of a point, that is, 0.125%. The advantage of student loan consolidation is that your interest rate is guaranteed not change over the life of the loan.
Do I Have to Consolidate All of My Student Loans?
You can choose to consolidate some or all or none of your student loans
. You can consolidate one loan, a few loans or all of your loans. You might want to consolidate the loans that have variable interest rates, and exclude the loans with fixed interest rates. Each student loan can be consolidated only once.
How Much Does Student Loan Consolidation Cost?
There are no fees for federal student loan consolidation
, no matter which lender you use. You can consolidate your student loans with any lender, not just the lender you borrowed through. This is a change in the regulations which became effective June 15, 2006.
Each year, the new interest rate for your variable rate loans is announced on June 1. The new rate is effective on July 1. Many students consider consolidating in June, if the July interest rate is going to be higher.
How Does Student Loan Consolidation Affect My Income Tax?
The interest you pay on your student loans is deductible on your federal income tax return
, whether or not the loans are consolidated. If you are single and making more than $50,000, there is a limit on the amount of student loan interest you can deduct on your federal income tax return.
What Are the Disadvantages of Student Loan Consolidation?
- You can use student loan consolidation to lower your monthly payment by extending the length of the loan. But when you lower the monthly payment, you will make more loan payments and you will pay more total interest over the years.
- On Perkins and subsidized Stafford student loans, you have a grace period of 6 months after graduation during which the government pays the interest on the loan. If you consolidate these loans before the grace period is completed, you lose the grace period of free interest. It is recommended that you do not consolidate the Perkins and subsidized Stafford loans while you are in school.
- If you consolidate a student loan while your loan is in its grace period, you can use the lower “in school” rate when determining your interest rate. However, if you consolidate a student loan, you will lose your remaining grace period. If you are in school, ask your school financial aid counselor to determine if student loan consolidation is right for you. Often it is best to consolidate your student loans near the end of your grace period.
- Make sure the lender is offering you the Federal Consolidation Program rather than a private consolidation program.
- If you use consolidation to lower your monthly loan payment, it will take longer to repay your loan. And you will pay more interest over the life of the loan. Ask how much interest you will pay in total.
- You are only allowed to consolidate each loan once.
- Private or alternative loans cannot be consolidated with the Federal Consolidation Program. But you can renegotiate private loans with the lender. Consolidate your federal student loans separately from any private loans that you have, because government loans will have lower interest rates than bank student loans.
- If you consolidate before your grace period or during your grace period, you lose the rest of the grace period.
- Monthly payments and interest charges begin immediately as soon as you are out of school.
- One of the benefits of Perkins loans is that it will be cancelled if you become totally disabled. You give up this feature when you consolidate the loan.
- If you have a Perkins or a Subsidized Stafford loan, it gives you the right to defer payments for up to three years in case of hardship. When you consolidate these student loans, you lose the right to defer payments.
- PLUS loans cannot be consolidated together with other government loans. They must be consolidated separately, because the PLUS loans are always in the name of the parents.
- It often happens that your lender resells your loan to another institution. You might not recognize the name of the holder of your loan.
- Married couples are permitted to consolidate their student loans together. However, this is not usually a good idea. There are disadvantages to joint student loan consolidation. if married partners consolidate their student loans jointly and then divorce, each partner is still liable for the entire debt of the other person. If one partner dies, the other partner is still liable for the jointly consolidated student loans of the deceased. Married couples should each consolidate his or her own student loans.
- Find out what late fees are charged on the consolidated loan.
Should a Student Still in School Consolidate a Loan?
As a student who is still enrolled in school, you are allowed to consolidate your federal loans. However, if you do consolidate a student loan, your monthly payments will begin as soon as you leave school. You will lose the 6-month grace period.
What Kinds of Federal Student Loans Can Be Consolidated?
- Subsidized and unsubsidized Federal Stafford Loans (Federal Family Education Loan Program and Federal Direct Loan Program)
- Federal Supplemental Loans for Students (SLS)
- Federal Perkins Loans
- Health Professions Student Loans (HPSL), including Loans for Disadvantaged Students (LDS)
- Health Education Assistance Loans (HEAL)
- Federal Insured Student Loans (FISL)
- Federal Parent Loans for Undergraduate Students (PLUS) (Federal Family Education Loan Program and Federal Direct Loan Program)
- Federal Nursing Loans (NSL)
What Are the Repayment Options With Student Loan Consolidation?
- Standard Repayment: Your payments will be a fixed amount each month (minimum payment will be at least $50).
- Graduated Debt Repayment: Your payments start small and then increase over time. Each monthly payment must equal at least the interest accrued on your loan between scheduled payments.
- Income Sensitive Debt Repayment: Your payments are based on your annual income and loan amount. Each monthly payment must at least equal the interest accrued on your loan between scheduled payments.
- Extended Debt Repayment: If you received your first loan on or after October 7, 1998, your repayment term may be extended up to 30 years depending on the total amount you have consolidated.
What Information Is Required to Consolidate My Student Loan?
To consolidate a student loan
, you’ll need to know the current balance, interest rates and lenders for your loans. If you don’t have the details on your loans, check out the National Student Clearinghouse loan locator at www.studentclearinghouse.org
, and click on the Students and Alumni tab. You can also find your loans in the National Student Loan Data System at http://www.nslds.ed.gov/nslds_SA/
If you have a US Department of Education PIN, you will be able to access your federal loan data online. If you completed the FAFSA online and signed electronically then you have a PIN. If not, or if you have lost or forgotten your PIN, one can be obtained at the Federal Student Aid PIN Registration website.
Who Will Consolidate My Student Loans?
The overwhelmingly largest student loan consolidators are Federal Direct Student Loan Program and Sallie Mae. Next largest are Citibank, Nelnet, NextStudent, JP Morgan Chase, Goal Financial, LLC, College Loan Corporation, AES/PHEAA, Student Loan Xpress and Wachovia Education.
I hope life brings you much success. I wish you a very happy day.
----- Surfer Sam