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Student Loan Consolidation: Frequently Asked Questions

Jul 24, 2007 Jennifer Williamson, Distance Education.org Columnist | 0 Comments

If you're like most college graduates, you have a motley assortment of student loans - some government, some private, with wildly varying interest rates.  And you probably have a lot of them. 

Many students consolidate their loans to bring interest rates down, lock in a fixed rate, and reduce the confusion caused by multiple loans with multiple lenders.  If you’re considering consolidation, here are the answers to some common questions.

What is consolidation, exactly?


When you consolidate your loans, your bank or credit union - or the federal government - pays off all your student loans and offers you a single loan through their own program.  You now have a single loan through a single creditor, equal to the amount of your original debt.  You're still paying the same amount, but you're paying only one creditor.

See Also: Online Graduate Degree Programs

Why would I want to consolidate my loans?


You may have noticed that your student loan interest rates vary wildly.  When you consolidate, you stand to save a lot on interest by locking in a single rate based on an average of all your interest rates.  The federal government sets a limit to the amount of interest you may have on a consolidated loan, which is often lower than the rates on many unconsolidated student loans.

In addition, many loans have variable interest rates.  If you consolidate, your interest rate will stay the same from year to year, no matter what.  This can save you a great deal of money in the long run.

How is my interest calculated?


Your bank or credit union will find the average of all the loans you’re consolidating, and round them up to the nearest eighth of a percent.  The government sets a limit to the amount of interest they can charge, and this varies by year.  Once you've consolidated, however, your interest rate won’t change.

To figure out what your interest rate will probably be, use FinAid’s consolidation interest calculator.

Can I consolidate my private and government loans together?


No; unfortunately you can't.  It's unfortunate because those private loans often have the highest interest rates, while government loans can have interest rates that are quite low. 

Federal consolidation is what most people mean when they talk about student loans, and the information here generally refers to federal loans.  With federal consolidation, the government sets the maximum interest rate, and the interest is calculated based on a weighted average of the interest on all the loans.  Stafford and PLUS loans, which typically have variable interest, are locked into a single interest rate when you consolidate. 

It is possible to consolidate your private loans, but you’ll have to do it separately - and the conditions aren't nearly as good.  You can only do it through a private lender.  You'll typically wind up with a variable interest rate, and the government doesn't put limits on the interest.  In most cases, it's best to leave your private loans unconsolidated.

When is the best time to consolidate?


As of July 1, 2006, you are no longer allowed to consolidate your student loans while you’re still in school.  You have a six-month "grace period" after graduating, during which you aren't required to start making payments on your loans.  This is your window for consolidation.

Who should I consolidate with?


There are two ways you can consolidate your federal loans: through a lender or directly through the government. 

With Direct Loan consolidation, you finance your loans through the Department of Education.  Some people choose to go this way because they trust the government more than they trust private lenders.  However, the interest rate is set by the government and will be the same, no matter whom you finance with.

You can often get a few more perks if you go through a private lender.  If you do, you'll get a FFELP loan - it stands for "Family Federal Education Loan Program."  These include slight interest discounts for automatic deductions or a consistent repayment history.

You may get many different offers from lenders, but bear in mind that this type of consolidation is a federal program and the major benefits, such as deferment, forbearance, and a fixed interest rate set by the government, will be the same across the board.

When should I avoid consolidating?


If you're an extremely lucky person and all your loans are fixed-rate and low-interest, do the math.  Your interest rate under consolidation may add up to more money than it would if you left your loans alone.

In addition, some employers will pay off certain types of federal loans - most often Perkins loans.  Check your employer's policies before consolidating, as some companies will only pay off unconsolidated loans.  You aren't required to consolidate every loan you have, and it may be in your best interests to consolidate only partially.

The financial decisions you make in the first six months after graduating will affect your life for years - even decades - to come.  It's important to do your research before consolidating.  Make good decisions now, and your student loans may be less of a burden in the future

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