Consolidate Student Loans

Now that you are facing the stress of dealing with the repayment of your student loans, you may want to opt for consolidation. Consolidating graduate student loans can be tricky, and several factors need to be taken into consideration when making your decisions. But if you decide that the benefits of consolidation outweigh the drawbacks, you can find a way to make it work, whether you have federal or private loans.

There is a difference between consolidating federal and private loans. The most glaring difference is that, with a Federal Consolidation Loan, your interest rate is fixed in keeping with a federal formula, while private consolidation interest rates can be either fixed or variable. Variable means that the interest rate can increase at any moment. If you are consolidating both types of loans, you should make sure to keep them separate.

Consolidating federal student loans

Borrowers are generally allowed up to 10 years to repay, when they consolidate Federal Stafford and Graduate PLUS Loans. However, some borrowers can qualify for the government’s Extended Repayment Plan. Borrowers who consolidate student loans through the Federal Consolidation Loan Program can refinance one or multiple student loans into one new fixed-rate loan. In other words, the original loan is paid in full and another one is initiated.

Anyone with eligible Federal Student Loans can get a Federal Consolidation Loan, and can do so without paying loan fees. Interest rates are fixed for the life of the student loan. Rates are based on the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth-percent or 8.25 percent, whichever is less. Borrowers do not need a credit card, and the fixed interest rates allow them to avoid future variable rate increases.

You must meet certain eligibility requirements to consolidate student loans received from the federal government. To qualify, the borrower must have one or more appropriate Federal Student Loans with a combined balance greater than $10,000. The borrower also must have left school, graduated or must be attending school less than half the time.

Borrowers may have only one Federal Consolidation Loan application in process at a time, and the loans must be in good standing, not in default. The borrower’s loans must also be in a grace period, deferment, forbearance or repayment status at the time of application. Eligible Federal Student Loans include:

• All Federal Stafford and Direct Loans
• Graduate PLUS Loans
• Federal Perkins Loans
• Health Professions Student Loans
• Nursing Student Loans
• Federal Supplemental Loans for Students
• Auxiliary Loans to Assist Students
• National Direct Student Loans
• Federally Insured Student Loans
• Federal Consolidation Loans

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Graduate PLUS Loans can be consolidated as soon as they are disbursed to the school, while Federal Stafford Loans can be consolidated only after graduation. A borrower with a subsidized or unsubsidized Stafford Loan must be consolidated with the government’s Direct Consolidation Loans Program.

Consolidating private student loans

Nearly any federal loan can be consolidated, but private loans cannot be consolidated using federal guidelines. However, private loan consolidation can be obtained. Private lenders are competing for your business and may offer borrower incentives, such as cash back, reduced rates and principal reductions.

To consolidate graduate student loans through a private lender, you will need to have proof of good credit or apply with a reputable co-borrower. Private loan consolidation may require a minimum loan balance, but private lenders tend to be more flexible than federal loan programs.

You have four main ways to repay your private, consolidated graduate-student loans. The standard plan involves fixed monthly payments for up to 10 years. The extended plan allows borrowers to extend the length of a loan up to 30 years, but each lender’s repayment terms will vary, often depending upon the balances of your loans.

Meanwhile, graduated repayment is tailored for the borrower who will require lower payments for the first few years and can make higher payments afterward. If you choose a graduated repayment plan, you should be aware that time you take off from paying on the principal of the loan will likely increase the total amount of your loan.

Income sensitive/income contingent repayment plans are quite rare and are offered only to borrowers whose income will be small. Lenders base payments upon the monthly income and employment status of the borrower, the amount borrowed and other factors. Payments are adjusted annually as the income of the borrower changes.

Things to consider

Before consolidating student loans, figure out how many loans you have and whether they are federal or private loans. You should also determine where you are in the repayment process, like whether you are in a grace period. If the loans are in default, you will be unable to consolidate them.

You should also consider your total number of lenders, and should take stock of the other monthly financial responsibilities you face. If using a private lender, you should be sure to consult one of your lenders for guidance before consolidation. Private loan consolidation allows for borrowers to shop around for the best deal, while federal loan consolidation must adhere to government standards.

Many benefits result from student loan consolidation, including the fact that consolidating student loans can stretch the repayment term and reduce monthly payments by as much as 51 percent. The repayment period could be extended to as long as 30 years, and consolidation can provide borrowers with low interest rates and give them the ability to make payments to a single lender.

However, before signing on any dotted line, borrowers should be aware of the drawbacks of consolidating student loans. As you extend your loan period length, you are adding to the total cost of the loan, since you are being charged interest for a longer period of time. If rates decrease, borrowers who have gone through the consolidation process cannot benefit from a break in interest rates because they are locked into a fixed rate. In addition, consolidation can cause borrowers to lose their benefits on unconsolidated loans.

If you are considering consolidating your graduate student loans, you are not alone. According to the education funding company NextStudent, 4,653,000 former students consolidated Federal Student Loans through the Federal Family Education Program during the past three years. Once you know your options and have reviewed your financial outlook, you can decide whether you will become a part of that figure.

Resources

It’s important to remember that policies change. Make sure you research your options carefully. These links will help you get informed:

• StudentLoans.Gov
• US Department of Education – Offices of Federal Student Aid
• Ed.Gov – Federal Perkins Loan Program
• Ed.Gov – Direct Stafford Loans