Consolidate Student Loans

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If you are reading this, you probably have student loan repayment fast approaching - we will show you how to consolidate student loans. Fortunately, you have options for repaying your student loans. One of them is referred to as loan consolidation, which you may discover makes perfect sense for your financial situation. Or, after checking out the pros and cons, and examining your future career and life plans, loan consolidation may not be right for you at this point. The important thing is that you are thinking about your future, comparing the different types of consolidation options available, and determining what makes sense for you. Given the time, work and money you've put into your education, this is a smart move.

Of course, you are used to making smart moves. You probably know this already, but going after that undergraduate degree or finishing off that graduate coursework is one of the smartest things you could have done. Sure it's been a ton of hard work, you've made lots of sacrifices and most likely there's a financial burden now placed on you and your family–but in the long-term, your degree will provide a foundation for you to earn more than someone who hasn't earned that credential.

Here's why: A bachelor's degree hanging on your wall will earn you 62 percent more than someone who has only a high school diploma, according to U.S. Census Bureau statistics. And over your lifetime, the gap between your old friend's high school diploma and your Bachelor's degree will turn out to be more like a gulf -- totaling more than $1 million. For those who are going after Master's degrees or PhDs, the news is just as good: You'll also stand to make more money than those who didn't take the next step, according to The College Board.

Even some college is better than none: the median salary is almost $5,000 more per year.

However, you probably don't need to be reminded about the loans you had to take just to get to this point. And if you're reading this, chances are you're trying to figure out how you're going to get by after you graduate, find a good job, take care of your living expenses, pay down those credit card bills, buy a car and start paying off your student loans. No matter how much loan debt you've accumulated, take heart, because you're not alone. The average for student loan debt ranges from $20,000 all the way up to $40,000, depending on the source of the information.

What is Consolidation?

Though the loan consolidation process and its terminology can be complex and confusing, the basic concept is easy to understand: You take all of your outstanding federal student loans (even if it’s just one loan) and bundle them into one new student loan with one monthly payment. The new rate is fixed–meaning it won’t change–and the length of the loan can be extended all the way up to 30 years, which can lower the amount of your monthly payments. It’s a kind of refinancing of your federal student loans.

Student loan consolidation has grown significantly during the last several years because students and their families have had to take on more financial burden due to a combination of steep increases in tuition (annual costs rose 35 percent during the last five years) as well as a decline in the amount of federal and state financial aid, including grants, to students. Put another way, this new era is being called “debt for diploma.” In turn, loan consolidation has become such a viable and necessary option that some 2.5 million students consolidated their loans in 2005. The U.S. Department of Education predicts that nearly as many students will do the same in 2006.

As for the considerations that can make student loan consolidation not the right choice for everyone, you first have to realize that by extending the length of your loan period (which does lower your monthly payments) you are adding to the total cost of the loan because of the extra time that interest on your loan is being charged. Put another way: You might end up spending more money in the long run.

If you have any variable rate loans, another consideration is that by locking in that one rate, you protect yourself if interest rates rise in the future; however, if interest rates go down, you are still locked in to your rate. Also, some new federal loans already have fixed rates. Consolidating these newer loans keeps the rate fixed, but they might get rounded up a bit. In addition, when you agree to the terms and conditions of your new consolidated loan, you lose all of the terms and conditions of your previous student loans. That’s important because some benefits contained within your previous loans might not be included, or may be different, in your new consolidated loan. Make sure you carefully read and compare how your original loans stack up against your new consolidated loan.

Federal Consolidation vs. Private Consolidation

Federal consolidation loans are a mechanism to refinance federal education loans only. Private consolidation loans are a way to refinance private education loans only. The main difference is that a federal consolidation loan comes with a fixed interest rate that follows a set federal formula, while private consolidation loans come with a market rate that may be fixed or variable.

If you consolidate both federal and private loans you should make sure to keep them separate - refinancing a federal loan with a private consolidation product will most likely result in a much higher interest charge than you'd pay if you kept it separate.

Private consolidation loans might be an attractive option for you. Here are some of the benefits you might find:

Longer repayment term (up to 30 years in some cases)
Lower monthly payment
One monthly bill
Potential release of cosigner from the original private loans
Weigh this decision carefully, as a longer repayment term usually means a greater cost of borrowing (you pay interest for more years). Also, make sure to consider the interest rate on the private consolidation loan versus your existing private loans - rate structures can vary widely.

Which lender is right for me?

If you’ve weighed the pros and cons, and decided that federal loan consolidation is right for you, go to the Department of Education's site and follow the instructions relating to completing consolidation on-line. If you have decided that private consolidation is what you are after, the next step is to pick a lender. Just like when you make any kind of big purchase (for example, a new PC or a car), you need to shop around for the best deal. As with any type of big financial investment, be sure to do your homework - compare all the types of loans you qualify for, read the fine print on different Borrower Benefits, and run the numbers. And then apply and get back to finding a job, studying for the bar, enjoying summer…

A helpful hint:
Don't have any idea what federal loans you have? Don't worry, you can find out! Go to
www.nslds.ed.gov
You'll need to know your FAFSA PIN, which you can retrieve from www.pin.ed.gov