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Should You Consolidate Your Student Loans
from: Kyle BesserA consolidation loan is just what it sounds like. You take two or more outstanding loans and refinance them into one consolidation loan. To a college graduate swamped with multiple student loans, loan consolidation is an enticing option. When you consolidate your loans, a lending institution pays off your existing loan balances and replaces them with a new, consolidated loan.
Consolidation offers several benefits. You will have just one payment each month and just one repayment plan to keep track of. You lock in a fixed interest rate that could save you money over a variable rate, especially when interest rates are low. You can extend your repayment timetable from 10 years up to 30 years, depending on the size of your debt, which can shrink your monthly payments by as much as 40%.
Federal Versus Private Consolidation
A law enacted last year eliminated the decades old "single-holder" rule that required borrowers who had all their federal student loans with one lender and wanted to consolidate to use that lender. Now borrowers can consolidate with any lender. In addition, Congress eliminated variable rates for federal Stafford loans. All federal Stafford loans issued after July 1, 2006, have a fixed rate of 6.8%, so consolidating no longer affects the interest rate those borrowers will pay.
The key terms for federal consolidation loans do not vary by lender. No application or origination fees are allowed, and there are no prepayment penalties. Federal law sets the period of time for paying back the loans and sets a ceiling on the interest rate.
Private consolidation lenders are not subject to these terms and may include variable rates and fees. Some of the benefits of a federal consolidation loan, such as interest subsidies on deferred loans, are not available on private loans. Some lenders offer discounts for good behavior. Most will cut your interest rate by a quarter point if have your payments automatically deducted from a bank account. Many will reduce your interest rate by 1 percentage point once you have made a certain number of consecutive on-time payments. Shop around and carefully compare before your decide.
Should you consolidate?
Despite the appeal , student loan consolidation isn't always good for everyone. Consolidation can help by extending the life of your loan and thus trim your monthly payments. If interest rates are low, you can lock in long-term savings, since less of your money will go to interest. You may have access to a new repayment schedule that is easier on your budget. Consolidation offers the simplicity of one monthly payment to manage.
If you have only a couple years or a few thousand dollars to go till you pay off your student loans, consolidation is probably more hassle than it's worth. Switching to a new lending institution might eliminate any benefits you've earned, such as lower interest rates for on-time payments over the years. Consolidating could make it impossible for you to have a federal Perkins Loan forgiven or reduced. If you can handle your monthly student loan payments as they are, carefully investigate how consolidating will effect the total amount you have to repay.
You can get a consolidation loan from any private lending institution with government approval or from the Department of Education itself. Not all consolidators are equal, so you should be careful. Some offer favorable terms like interest rate reduction for making on-time payments or choosing automatic withdrawal. Some may offer repayment plans better suited to your financial situation. You should do enough research to be able to negotiate the most favorable terms. Public and private loans can't be combined, but if you have multiple private loans, you can consolidate those, too.
When should you consolidate?
Timing is everything. If you are just finishing college, you will want to consolidate your student loans after you graduate but before your grace period ends so that you can take advantage of the lower in-school interest rate, the 91-day T-bill rate plus 1.7% rather than the standard repayment rate of T-bill rate plus 2.3%. You will need to complete all the paperwork and have it processed and approved before repayment begins. One downside is that your grace period will end once your consolidation loan goes through. If you have already been paying off your loans for a while, you can consolidate at any time.
The interest rate on your consolidation loans is the weighted average of the interest rates on the loans you have, rounded up to the nearest 1/8 of a percent and capped at 8.25%. If you are confused, you can get help with the math using an online calculator. At the Federal Direct Consolidation Loans website, click on "Borrower Services" and then "Online Calculator." Interest rates are determined by the federal government and change each year on July 1.
Current law dictates that you can only consolidate once, so if you consolidate at a 6% interest rate and rates later drop to 3%, you're out of luck. There are two exceptions. If you have since gone back to school and acquired new student loans or if an outstanding loan was excluded from your original consolidation, you may be able to consolidate again.
Should you and your spouse bundle your student loans?
A married couple can jointly consolidate their loans, but it may not be a good idea. If you do, you will both have to agree to assume full responsibility for payment of the debt. If your marriage should end in divorce, your loans will still be together in one Direct Federal Consolidation Loan, and each ex-spouse will be held responsible if the other does not pay. Neither of you would be able to get an in-school loan deferment because both of you would have to be enrolled to qualify.
Is loan serialization better than loan consolidation?
With loan serialization, a single lender buys your student loans and "stacks" them. You maintain your original terms and interest rates, but you pay the loans off one at a time, starting with the loan with the worst interest rate. Serialization doesn't lock in a good interest rate. Federal Perkins Loans cannot be serialized.
How you can apply for a consolidation loan?
Most lending institutions, including the federal government, offer both online and paper applications. If you have all direct loans, you can even apply over the phone. You can ask the lender you've chosen for an application, complete it, and then wait for them to send you the paperwork to sign. Be honest with your information because the lending institution will verify that the information you provided is true. When you get your paperwork from the lender, go over everything carefully for accuracy. Once your Direct Federal Consolidation Loan has been approved, you'll receive notification and a new repayment schedule from your new loan holder.
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