What Does it Mean to Consolidate Student Loans?
College students often find that they have to borrow from several different lenders to cover their tuition and other school needs. If that's the case for you, and you have begun repaying your student loans, you should consider consolidation.
Consolidating student loans simply means bringing all of your outstanding loans issued by different lenders into one loan. If you have student loans outstanding, this can save you money. It also can help you manage your debt and avoid default because you have fewer loans.
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Paying For College with Loans
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There is a wide array of borrowing options available to students and their parents to help them fund their higher education needs. Of those, there are 15 that can be consolidated. They include Federal Perkins Loans, Federal Subsidized and Unsubsidized Stafford Loans, Guaranteed Student Loans, Health Professions Student Loans, Loans for Disadvantaged Students and Supplemental Loans for Students, according to the U.S. Department of Education.
Higher Education Act
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The Higher Education Act of 1965 provides for loan consolidation under two programs: the Federal Family Education Loan Program and the Direct Loan Program, according to Federal Direct Consolidation Loans information center. These programs allow for a borrower's loans to be paid off and for a new consolidation loan to be created.
Consolidation generally extends your repayment period, which can result in a lower monthly payment, notes the U.S. Department of Labor.
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How to Consolidate
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One of the first things you should do when considering consolidating your student loans is contact one of your current lenders. You will want to find out if they have loan plans that allow for consolidation.
Steve Bucci, a debt adviser for Bankrate.com, says checking with your own bank or credit union to learn if they offer consolidation plans also is a good idea. In fact, he recommends going with your own bank or credit union if you find that the interest rate they are offering is comparable to other student loan lenders. Comparison shopping for the best terms and rates is imperative, Bucci notes.
The New Consolidated Loan
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Your loans may each carry varying terms and repayment schedules. If you consolidate your outstanding loans, you will be able to simplify your loan repayment process.
The Loan Consolidation Information Center notes that the new loan could have a lower interest rate than one or more of the original loans. You might have the option of choosing between a variable-rate loan or a fixed-rate loan. You will be making your payments to the lender that consolidates your loan.
Key Considerations
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While consolidating current loans into one fixed-rate loan with an affordable monthly payment is a good idea, Bucci cautions that borrowers be aware of extending their loans for too many years. A consolidation loan product, even with a low interest rate, that is payable over 25 years versus 20 years will probably be costly in terms of interest charges. The U.S. Department of Education further explains that consolidation may make it easier for you to repay your loans, but you will pay more interest if you extend your repayment period through consolidation since you will be making payments for a longer period of time.
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References
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