By consolidating private student loans, you simplify the repayment process, giving yourself one instead of multiple monthly payments. In some cases, consolidation allows you to refinance the loans at lower interest rates. In the past, federal loans carried variable interest rates, so consolidation of private with federal loans was rational. Based on current legislation, you should be cautious about combining federal with private loans because federal loans carry fixed interest rates that generally are lower than on private loans. Plus, federal loans maintain benefits or protections, such as repayment based on your income, that you would lose if you consolidate.
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Difficulty:
Moderate
Instructions
1
Gather information about all of your private student loans. Different companies likely issued your loans as you progressed through your college years.
2
Determine whether your private loans are eligible to be consolidated, because some lenders restrict consolidation. You can read through your loan documentation or contact a customer service representative from your lender.
3
Compare options with many lenders, especially because you generally can consolidate loans only once. If you consolidate today and interest rates decline significantly over the next six months, you are stuck paying the rate you received when you consolidated. Alternatively, if rates increase, you pay the interest rate determined when you consolidated.
4
Review potential consolidation fees such as origination charges. Avoid consolidating with companies that charge prepayment fees, which penalize you if you pay the loan off early. Most major companies are legitimate and do not charge excessive fees, but consolidation scam artists and unscrupulous companies do exist.
5
Consult with experienced professionals, such as certified public accountants and financial aid officers, just as you would seek advice before signing a mortgage. Your loan consolidation paperwork will span several pages and include different type sizes plus finance terminology. Once you sign the consolidation agreement, you have entered into a legally binding contract.
Tips & Warnings
Remember to deduct the interest that you pay from your federal income tax. With most student loan companies, the monthly payment represents a minimum required. To pay off your loan early, you should pay more than a minimum. Before consolidating, make sure that you will not face penalties for paying more than the monthly minimum.
You generally will receive lower monthly payments after you consolidate. However, the total cost and life of your student loans will increase. For example, instead of paying a total of $500 a month to two lenders for 10 years ($60,000), you might be paying $395 a month to one lender for 15 years ($71,100).
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