Student Loan Consolidation: Is It Right for You?

by Tiffany Young

With all the stress and worries of tests and papers, there’s no time to worry about financing college. Get your finances straightened out this summer, before classes start back, so that you can spend all your time like you should: buried in books.

What is Student Loan Consolidation?

Loan consolidating can be very confusing. Postcards that come in the mail saying “Consolidate Now!” can make it seem like a brainless endeavor, but what loan consolidation actually means to your finances in the long run is a puzzle to many people.

Loan consolidation is when several different loans are paid off by one vendor, who opens a new loan. This new loan allows you to pay just one bill instead of several different loans, possibly, from several different lenders. There are benefits to consolidating debt, but there can be drawbacks, too. Depending on your own situation, you will need to discover whether consolidating loans or keeping loans separate is the best way to go. But don’t wait until sometime down the road to consolidate. If you decide that consolidation is the best option for you, do it now. Consolidation rates are at record lows through June 30, 2005. On July 1, 2005, interest rates for students in college or still in their six month grace period will rise from 2.77 percent to 4.66 percent. Rates will rise from 3.37 percent to 5.26 percent for student borrowers already making payments.

Rates for Loans in Repayment (Source: Sallie Mae)
2000-2001 8.19%
2001-2002 5.99%
2002-2003 4.06%
2003-2004 3.42%
2004-2005 3.38%
2005-2006 5.07%

Benefits of Consolidation

One benefit of loan consolidation is the simplicity of paying one monthly bill and knowing that all your debt is through one financial lender. There is no need to have seven different addresses and banks, to which you must keep up with and send out bills on a monthly basis. The monthly payment is usually much lower on consolidated loans than individual loans. If you decide to consolidate, they will take all your loans together and then give you a few options on how fast you want to pay them back.

If you are still struggling with getting a job, then there are options that take this into account. For example, you can pick an option that has a smaller monthly fee for the first couple of years while you get started on your career. Then the monthly fee increases on the assumption that you will have your finances in order and be making more money than you had been when you had just graduated. While this is great for students who are young and have very little income coming in, many students going back to college may have a spouse to help them repay their loans.

If you can afford paying a higher monthly payment for your student loans each month, you should. That way you can pay off your balance sooner and avoid paying more interest than you have to. Consolidated loans also allow you to pay more than your monthly balance without incurring fees. So if you have extra money one month, say your income tax refund, you can apply it to your student loans and pay the debt off quicker. And the best thing about loan consolidation is that you can generally get a lower fixed rate for your consolidated loans than on individual loans. A fixed rate means that they won’t increase your rate later on as inflation rises. This generally works in your favor, since rates tend to increase as time goes on. Come July 1st, rates are will rise so, locking in a low interest rate now would do you good in the future.

The Negative Side of Consolidating

The flip side of the equation is that if you have private lenders for your loans, you will not be able to consolidate your loans through federal consolidation. However, there are some private consolidation lenders you may want to look into. Keep in mind that they are not held to the same regulations that federal loan consolidation programs are by law. Another thing to consider is that consolidated loans allow you to pay back the amount of the loan in more than ten years. However, doing so would not be advised financially because you will be paying interest on the loan the entire time. It’s best to get your student loans paid and be able to keep your monthly payment amount for savings each month.

How to Consolidate Your Student Loans

To consolidate your loans, log on to FinAid for an extensive listing of banks that can provide information on, and set up, your consolidated loans. You’ll need to fill out a little information on yourself and then the financial institution of your choice may handle the majority of the work, like finding all your loans and putting them in one account. Whether they do this or not, make sure you go through your own records to make sure that everything they find is accurate.

You may only consolidate once, so if rates go down you will be stuck with your current rate, although a lower rate is unlikely and a significant increase is expected come July 1. Whatever you do, you might as well decide your financial fate now, before it’s too late. Inaction may be a way of choosing, but not necessarily the smartest choice for your circumstances. Study your finances now, so you can study for exams later!

Tiffany Young is an Austin-based writer and photographer.

Student Loan Consolidation: What You Should Know

– Interest rates for adult students attending college or in their six month grace period will rise from 2.77 percent to 4.66 percent on July 1. Rates will rise from 3.37 percent to 5.26 percent for borrowers who are making payments on their loans. If you are not enrolled in classes and are in loan repayment for your Stafford loans, consolidating a debt of $20,000 could save you $4,500 over 20 years. Graduate students who owe $55,500 could save $14,668 over 25 years.

– Students should only consolidate variable-rate loans (for example, Stafford Loans), not fixed-rate loans (like Perkins loans). Because Perkins loans are fixed rate, thre is no financial benefit and you may lose some loan forgiveness provisions: for certain types of service (such as teaching or nursing), disability, services in the armed forces or Peace Corps, etc.

– Student loan consolidation programs are not the same among lenders, with varying interest rates, grace periods, penalties for late payments, and time for loan repayment. Consolidation may result in the loss of benefits such as loan deferment and some loan forgiveness options. If you have loans with more than one lender, research which lender offers the best consolidation package in discounts and other incentives. For example, consolidation through Sallie Mae offers a 0.25 percent reduction in your interest rate when you automatically transfer payments from your bank account. When you pay on tme for 36 months, your interest rate is reduced another percentage point. The Sallie Mae site offers an online calculator to show you how much you might save. You might also research the benefits of consolidation through the Department of Education’s loan consolidation program.

– If you are married and your spouse also has outstanding student loans, you can jointly consolidate the loans with anagreement to repay regardless of total loan indebtedness or any future change in marital status.

– Student loans in default may be consolidated if satisfactory payment arrangements have been made with the loan lender or guarantor. Generally you will need to be in repyament and have made three consecutive and voluntary full on-time payments.

– If you are near the end of loan repayment, consider deferment or forbearance if in financial need. Although consolidation lowers monthly payments, it also means more interest will be accrued over the life of the loan and significanlty increase the loans total cost. To best reap the benefits of consolidation, try to make the same monthly payment and pay the loan ahead of time.

– For help locating information on your loans, the Department of Education’s National Student Loan Data System keeps an an online record of all your federal education loans and grants. It provides loan descriptions, date of loan origination, and loan amounts, as well as any outstanding balances. You will need your U.S. Department of Education PIN to access the site. (If you do not have a PIN and need to apply, your pin will usually be mailed to you within ten business days of application).

– To lower total interest rates and cost of your loan, you may not want to consolidate all of your student loans (for example, you may choose to include only unsubsidized loans or exclude a high interest loan with a low balance.) Check with your lender which options would be best for you.

– A few more reasons to consider consolidation: Interest rates are expected to rise an additional 1.5% to 2.0% on July 1, 2006. Lawmakers are proposing to change the student consolidation loan program from a fixed interest rate to a variable interest rate, and may also include a 1% loan origination fee (currently there is no origination fee for consolidation.)

Need additional information? EdFund has a publication that discusses the advantages and disadvantages to loan consolidation, and provides tips on saving money along with worksheets.