FAQ on student loan consolidation
Consolidating student loans is the act of putting a different (or even one) loan into a new package. You get some special benefits, and you can structure your credit the way you want.
Why should I consolidate?
The main reasons for considering student loan consolidation are:
- The potential for smaller monthly payments
- Fixed interest rate
- Write only one check for various credits
- Potentially flexible payments in difficult times
Depending on your circumstances, this may or may not be so interesting to you. If you are not worried about rising interest rates, for example, you may not mind getting a fixed price. Also, if you pay without any hassle, there may be no need for lower payments.
How unique is student loan consolidation?
There are a lot of debt consolidation programs out there. Student loan consolidation programs are unique because they provide certain benefits that come only with student loans. Some of the great players are:
- You do not need to qualify based on your bonus
- There is no maximum amount
- You could potentially delay repayment
- Debts are discharged with the death of all borrowers
- Interest paid on student loans may be tax-deductible
Generally, consolidation is most beneficial when consolidating federal student loans under a government-sponsored consolidation program.
- Learn the benefits of Federal Student Loans
If you have private student loans, you can still “consolidate” but really only refinance those loans.
What are some downsides to consolidation?
Do some extra homework if you have Good Credits or if you are still in school. It can be more complicated, and you don’t want to untrained to give up any benefits.
Keep in mind that lowering your monthly payments (extending the repayment period) will ultimately depend on how long-term your interest is. However, you can choose a lower payment today if you wish, and then make a higher than necessary payment if your income increases.
All my loans are from one source – should I consolidate?
You don’t have to, but you might want to. The borrower simply repackages your loans so that they have the features mentioned above (fixed-rate, etc.). If you have used only one source of lending, you may have limited options on which to consolidate. If you are still in school, consider getting a loan from other lenders so you have more choices when you graduate.
Remember that US government loans are always more favorable for loans than private student loans. Think carefully before mixing the two types (for example, you need a good reason to consolidate federal student loans with a private lender).
How do I know about my interest rate?
Check your statements. Some will show a rate on a given loan. If you can’t find it, call your lender and ask. You may have several credits – one for each enrollment period, so be sure to get them. Finally, you can get information about the loans and view the current rates on this Direct Loan page.
There are (or would be) several drawbacks to joint consolidation. If you want to defer (when you temporarily stop paying, perhaps because of unemployment), both spouses must qualify for deferral.
Moreover, if you combine loans and one of you should die, the remaining spouse will have to repay the loan to the deceased. In addition, you will have an awkward time divorcing and having your loans in common.
Finally, there is the issue of loan forgiveness. Especially if one of you works in public service, you may waive the possibility of these loans being cleared in the future. Who needs consolidation?
You will probably get a bunch of mail while you are near graduation. Who to trust?
If your loans are from government programs, it is often wise to consolidate under a federal direct loan program. Again, these loans have the most unfavorable characteristics. For full details, check with the US Department of Education.
It is also worth asking your financial aid office for recommendations. They may have heard some recent success stories (and horror stories).
If you decide to work with a private lender, be careful about combining federal and private loans. The purest form of consolidation is available only for federal loans, but it is possible to combine private loans.