Student loan consolidation can be a great help to you in affording college.
How does Student Loan Consolidation Work?
Student Loan Consolidation combines several student or parent loans into one single loan from a single lender, which is used to pay off the balances on the other loans. You then owe the money that was used to pay off those balances to the single lender.
Who can Consolidate?
Both students and parents that borrow money for affording college can consolidate their loans. Parents and students cannot combine their loans by consolidating, but they can consolidate separately; this is because you can only consolidate loans from the same borrower.
Students are only able to consolidate their student loans after their loans enter repayment or during their grace period. Students may also consolidate loans that are in default as long as they have made acceptable repayment arrangements.
Students may not consolidate their student loans while they are in school, but parents can consolidate PLUS loans at any time they wish.
Which Student Loans can be Consolidated?
A student may consolidate any federal education loan, and it is possible to even consolidate a consolidation loan (note that there are some restrictions on consolidating a consolidation loan, though). Private loans and parent loans can also be consolidated.
Who can you consolidate with?
-Students and parents with students loans to consolidate can consolidate with any lender, even if all of their student loans are from a single lender. Direct Loans from the government can also be consolidated from any lender. This will be an advantage to you in consolidating your student loans, as you can look around for a lender that offers better discounts or a lower interest rate.
Also note that most lenders require a minimum balance before they will consolidate your student loans. For example, a lender might only offer student consolidation loans for a borrower with loan balances of at least $10,000. Many lenders require you to have a loan balance of at least $7,500. A few require you to have at least $5,000, and the Federal Direct Consolidation Loan Program requires no minimum balance for student consolidation loans.
Lenders cannot discrimate against borrowers (in considering them for a student consolidation loan) based on the type/number of student loans, interest rate of the loans, type/category of educational institution, or the repayment schedule that the borrower wants.
Lenders CAN discriminate against a borrower based on the amount of the loans being consolidated, which is why they are allowed to set a minimum balance.
Interest Rates:
The interest rate of a consolidation loan will be the weighted average of the interest rates for the loans being consolidated. This amount is rounded up to the nearest .125% and is capped at 8.25%.
Example: A student decides to consolidate two loans, one for $5,000 at 4% interest and another for $10,000 at 6% interest. The weighted average will be [ ($5,000 * 4.0%) + ($10,000 * 6.0%) ] / [$5,000 + $10,000] = 5.333%
The weighted average, 5.333%, will be rounded up to the nearest 1/8 of a percent, which is 5.375%.
Remember: this weighted average will not fundamentally alter the original cost of any of the loans, or save you money in the end. While the interest rate may be lower than the highest of your interest rates, it’s also higher than your lowest interest rates.
During the lifetime of the loan, the amount of interest that you pay will not change towards your advantage, regardless of whether you consolidate or not. In fact, consolidating will mean that you end up paying more interest in the end. It just makes the payments over a longer period of time, so that you don’t have to pay as much each month.
Repayment Plans:
There are several repayment plans available for student consolidation loans, and some are beyond the standard 10-year repayment period; plans that offer this include extended repayment, graduated payment, income sensitive payment (FFELP only), and income contingent repayment (only for Direct Loans) plans. You will receive the standard 10-year repayment plan if you don’t specify the repayment terms.
One of the benefits of consolidating student loans is here, in that doing so will usually decrease the size of your monthly payment by extending the loan term beyond the 10 year standard. Depending on the amount of your student loan, the student loan term can be extended anywhere from 12 to 30 years. This will often make it easier to repay the loan, however, remember that extending the loan increases the total amount of interest paid over the lifetime of the loan.
Also understand that you don’t need to pick an alternate repayment plan. It is actually better to stick with the 10-year repayment period, as this will save you a lot of money in interest.
-Federal education loans (this includes consolidation loans) have no prepayment penalty, so you can pay off part or all of your federal education loans early without being charged for it.
Repayment of a student consolidation loan will begin within 60 days of the loan being disbursed, unless you qualify for a forbearance or deferment.
Also note that there is no cost to consolidate. You should not be charged any fees to do so.
Websites for more info:
Common q’s on consolidation
List of lenders who offer federal and private student laons, including student consolidation loans
**If your school participates in direct lending, also check out federal direct consolidation loans
Consolidation loan discounts
Jan 3, 2009
