Consolidating Your Student Loans

Consolidating Your Student Loans

Know the benefits and disadvantages of combining multiple loans into one.

If you borrow a number of student loans while you're in school, you might have trouble keeping up with all the payments when it comes time. Consolidating your loans might help.

Federal Consolidation lets you combine loans you obtained from one or more lenders, and/or several different federal programs, into one new loan.

Before deciding to consolidate your loans, get all the facts and apply them to your particular situation. After considering the benefits of loan consolidation, as well as the ways it might hurt your loan status, you can make an informed decision.

The positive and negative aspects of taking out a Federal Consolidation Loan

You can consolidate while you are in your grace period or in repayment (including during a period of deferment or forbearance).

Positive — Consolidating variable-rate Stafford loans (disbursed before July 1, 2006) while you are in your grace period or in a period of deferment can cause you to receive a lower Consolidation loan interest rate.

Negative — No matter what loans you are consolidating, if you consolidate while you are still in your grace period (the six months after you leave school before you start making payments), you forfeit any remaining grace period and have to begin making payments on your Consolidation loan within 60 days.

When it is advantageous for you to do so, try to consolidate toward the end of your grace period. Talk to your lender about the timing that works best for you.

By consolidating your federal education loans, you can extend your repayment period from 10 to up to 30 years.

Positive — Depending on your total education loan debt, you may be eligible for a repayment period of up to 30 years on your Consolidation loan. Paying the same debt over a longer time means lower monthly payments. If you are unable to make your minimum monthly payment on your current loans, this may be a good option for you.

Negative — Stretching your debt over a longer time also means you'll pay more interest over the life of your Consolidation loan. So you'll actually wind up paying more for your loan in the long run. If you consolidate your loans, the best strategy is to request the shortest repayment period that you are allowed and can afford. This will enable you to pay off your loan more quickly and save more interest. And remember, there is no penalty for prepayment on your loan.

Consolidation gives you one payment with one lender.

Positive — Consolidation can simplify your life. If you consolidate all of your student loans, you have to make payments to only one lender - less paperwork, less hassle.

Negative — You may give up some benefits that some of your loans currently provide, like deferment eligibility or loan cancellation options. In addition, if you have recently graduated, you may have to give up all or part of your grace period, depending on when you consolidate.

Other things you should be aware of:

Some consolidators may try to get you to consolidate ALL of your debt - including student loans, credit card debt, and any private loans you may have.

How to avoid trouble — Consolidation loans that include ones that are not federal education loans are "private" loans that generally do not have the same benefits as the Federal Consolidation loan. So be aware that if you consolidate other types of loans or debts with your student loans into a private consolidation loan, you risk substantially raising the overall interest on the loan and may lose some of the deferment eligibility or loan forgiveness options that federal education loans carry.

Many companies offer consolidation and many provide good service, but some may not be able to provide the service you need or want. It is always a good practice to know a lender and its reputation.

How to avoid trouble — Check with your current lender(s) about whether they offer loan consolidation or check with your school's financial aid office about the experience of other borrowers with particular loan consolidators. Your school maintains a list of preferred lenders - reputable banks and servicers that have tried-and-true experience working with education loans. This list can help you do your homework and find the lender that is best for you.

Federal Consolidation Loans FAQ

Q: Can I consolidate my Stafford loans if I'm still in school?

A: No. Effective July 1, 2006, a borrower may no longer request to enter repayment on his or her Stafford loan(s) while still enrolled in school in order for the borrower to consolidate those loans. You will have to wait until you are in your grace period or in repayment on your Stafford loans in order to consolidate. (More details can be found at TG's Consolidation Web page, or you can send an e-mail message to cust.assist@tgslc.org).

Q: Is it ever financially unwise to consolidate?

A: Generally, it's not a good idea to consolidate if you are close to paying off your student loans. Consolidation may affect your eligibility for certain loan forgiveness programs and interest subsidies (see a list of Eligibile Loans below).

Q: How long do I have to decide?

A: You should not feel pressured to consolidate. Generally, consolidation is a one-shot deal and this is a big decision which you should consider seriously. If you decide to consolidate, the timing of your decision may impact the interest rate you receive on your Consolidation loan. You should keep in mind that it is best to consolidate at a time and in a way that will be most advantageous for you, particularly with regard to the interest rates of the loans that you want to consolidate. The interest rate on a Consolidation loan is the weighted average of the interest rates (as of the date the application is received by the lender) on all of the loans you are consolidating, rounded up to the nearest one-eighth of a percent. (For a sample Consolidation loan interest rate calculation, visit TG's Consolidation Calculator.) Here are a few things to consider.

If you took out a Stafford or PLUS loan on or after July 1, 2006, it carries a fixed interest rate of 6.8% or 8.5%, respectively. The rates remain unchanged for Federal Undergraduate Unsubsidized Stafford, Graduate Unsubsidized and Subsidized Stafford and PLUS loans that are first disbursed on or after July 1, 2008. All Federal Undergraduate Subsidized Stafford loans that are first disbursed on or after July 1, 2008, have a fixed interest rate of 6.0 percent for the life of the loan.
However, if you took out a Stafford or PLUS loan before July 1, 2006, it carries a variable interest rate that is adjusted annually on July 1 (and remains in effect through the following June 30). The new interest rates for variable-rate Stafford and PLUS loans are announced each year in late May, which gives you a chance to see if the rates will increase or decrease (Rate chart available at TG Online).

Note: Stafford loans that have variable interest rates actually have two levels of rates. The interest rate is lower when you are in school, in your grace period (the six months after you leave school before you have to start paying back your loans), and in periods of deferment. The interest rate is higher when you are in repayment. So, if you consolidate a variable-rate Stafford loan while you are in your grace period or while you are in a period of deferment, the interest rate on that loan can be up to 0.6% lower, which will have a positive effect on the calculation of your Consolidation loan interest rate.

Q: Are there any fees for consolidating?

A: There are no origination fees or other charges for obtaining a Consolidation loan.

Q: Is there a minimum balance required to get a Consolidation loan?

A: Lenders are permitted to set minimum balance policies, but the amount varies from lender to lender.

Q: What questions should I ask my lender if I am considering consolidation?

A: It's a good idea to ask your lender to figure out what your monthly payment will be and how long it will take to pay the total loan balance.

You might also ask your lender to help you figure out if you should include all your eligible student loans. Since the interest on your Consolidation loan is based on a weighted average of the existing student loans, it might be wise to leave out a high interest loan with a low balance — if you can afford to pay it off separately - so it doesn't drive up the interest on your Consolidation loan.

Make sure you ask your lender(s) about incentives. They may offer additional breaks on interest if you agree to make your payments through automatic debits each month or if you make consistent, on-time payments for a specified period of time.

Eligible loans

Loans from the following programs are eligible for consolidation:

FFELP loans (Stafford, PLUS, SLS, and Consolidation loans)
FDLP loans (Stafford, PLUS, and Consolidation loans)
FISL loans
Perkins Loans
Health Professions Student Loans (HPSL) including Loans for Disadvantaged Students
Nursing Loans Program (NSL)
Health Education Assistance Loans (HEAL)

Certain stipulations apply to which loans in certain categories can be consolidated.

Delinquent or defaulted loans can be considered for consolidation if satisfactory repayment arrangements have been made with your lender or guarantor.

For information about your specific situation and whether consolidation is a good option for you, contact your lender(s) or loan servicer(s). You can reach the experts at (800) 845-6267 or send an e-mail message to cust.assist@tgslc.org.