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Student Loans: Consolidation

Student Loan Consolidation is the third post in our Student Loan series. Make sure to check out previous articles on student loan basics [1] and repayment options [2]!

After graduation, you might want to consolidate your loans. Consolidation refers to the act of taking out one loan equal to the sum of all your loans (since you would likely have one for each year you were in school), paying off the initial loans with that sum, and then making one payment to pay off the consolidation loan. You do not actually receive the money from the consolidation loan – the government or private lender performs the consolidation for you to ensure that all underlying loans are paid off in full.

We will focus on how to consolidate federal loans from the government eligible [3] for consolidation. Check with your private lender for information on how to consolidate private loans.

Benefits of Student Loan Consolidation

The largest benefit [4] of school loan consolidation is having one payment with one due date. This helps ensure that it is easy to pay your bill on time, and prevents you from having to decide which individual loan to target first. Other benefits are a uniform interest rate and terms and a clear understanding of the principal balance and accruing interest.

When to Consolidate School Loans

Most people who consolidate do so immediately after graduation. You will likely receive information on consolidation during exit counseling at your college. The government will also mail you consolidation information during your grace period (the 6 months after graduation when you do not have to make payments). You can consolidate loans at any time as long as you haven’t done so in the past. If you have a consolidation loan already, but acquire one or more new student loans, you can reconsolidate all the loans together.

Things to Consider When Consolidating Student Loans

An education student loan consolidation loan makes sense for most people, but circumstances do vary. Make sure to consider the following factors when deciding whether to consolidate [5]:

  • Pay-off Options: Consolidated loans and individual loans used to have different pay-off options. With the new student loan legislation, all loans are made directly by the government. As such, pay-off options are similar for all types of loans. You can choose standard repayment, extended repayment, graduated repayment, income-based repayment and income-contingent repayment. The repayment options that you can choose from depend on your income and total loan amounts. The government provides this calculator [6] to help you see all options for your specific situation. For more information, see “Choosing a Repayment Option [2].”
  • Consolidation Term: When you consolidate, your total timeframe for repayment may be extended. The standard repayment term for most student loans is 10 years; consolidation loans may allow you to pay over as many as 30 years. If it is important to you to pay off your loans as soon as possible, you may want to be “forced” to do so by keeping standard repayment on separate loans rather than consolidating.
  • Monthly Payment amount: Your monthly payment amount will vary depending on the payoff plan that you choose and the total length of time that you are in repayment. Consider your monthly income and expenses to help decide which monthly payment amount makes the most sense for you.
  • Total Pay-off Amount: The monthly payment amount and repayment term will determine the total amount you pay on your student loan, which is made up of both principal and interest. A lower monthly payment and longer term will mean more interest paid and a larger total pay-off amount. This in turn can reduce the cash you have available for other goals like buying a home or saving for your own child’s college tuition.
  • Consolidation Benefits: The government may offer an interest rate reduction if you consolidate your loans, sign up for automatic payments or make a certain number of payments on time. The government may also forgive loan balances [7] after a certain number of years if you make below a certain amount and/or enter specific professions. These benefits change depending on the types of loans you are consolidating and when you do the actual consolidations. But make sure you research benefits available to you as part of your decision on whether to do student loan debt consolidation or not.

How to Consolidate Student Loans

If you are ready to consolidate your loans, you should do the following:

  1. Decide which loans to consolidate: Remember that you do not have to consolidate all loans. For example, if you have 8 loans for 4 years of undergrad and 4 years of med school, you can choose to only consolidate 6 and pay the other 2 off separately. You might want to do this if you want to quickly pay down small-dollar loans with high interest rates.
  2. Calculate interest rate: Make sure you know what your combined interest rate [8] will be. Since consolidation loan interest rates are now weighted, your combined student loan consolidation rates will not be any more or less than if you kept your loans separate. Even still, knowing your combined interest rate is important for the next step.
  3. Research repayment options: Last week, we focused exclusively on the different types of repayment options [2] and helping you choose the one(s) that make sense for you. It is vital that you research and understand your repayment options before consolidating. Take note of the monthly payment, length of repayment, and total amount of interest paid for each option. You want to strike a balance between an affordable monthly payment and paying as little total interest as possible.
  4. Consolidate: Finally, follow the easy steps provided by the Department of Education at their Consolidation Information Center [9] to actually apply for and obtain the consolidation loan.

Check out all of the posts in our Student Loan series!