This college funding strategy does not really help families in preparation for or during school years. It comes into play typically after students graduate from college or graduate school. Similar to refinancing a mortgage, Consolidation Loans combine several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. Consolidation loans are available for most federal loans, including FFELP (Stafford, PLUS and SLS), Perkins, FISL, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans and Direct Loans. Some lenders also offer private consolidation loans for private education loans.
401kid’s Preferred Student Loan Consolidation Vendor List gives graduates several quality options to choose from.
There are many reasons why consolidating student loans makes sense. Here are the highlights:
- Interest Rates: The interest rate on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25%. If you are consolidating loans with different interest rates, the weighted average interest rate will always be in between. Further, the amount of interest you pay over the lifetime of the loan will be about the same.
- Consolidating is Free: Aside from small increase in the interest rate on the consolidation loan, there is no cost to consolidate your loans. There are no fees to consolidate.
- Anyone can Consolidate: Both student and parent borrowers can consolidate their education loans separately. Students and parents cannot combine their loans through consolidation, since only loans from the same borrower can be consolidated. Married students are no longer able to consolidate their loans together.
- When you can Consolidate: Students can only consolidate their education loans during the grace period or after the loans enter repayment. Loans that are in default but with satisfactory repayment arrangements may also be consolidated. Students can no longer consolidate while they are still in school. Parents, however, can consolidate PLUS loans at any time.
- You Can Consolidate with Any Lender: Students and parents can consolidate their loans with any lender, even if all of their loans are with a single lender. Direct Loans can also be consolidated with any lender. This allows you to shop around for a lender that offers a lower rate or better discounts.
- Repayment Plans: Consolidation loans often reduce the size of the monthly payment by extending the term of the loan beyond the 10-year repayment plan that is standard with federal loans. Depending on the loan amount, the term of the loan can be extended from 12 to 30 years. The reduced monthly payment may make the loan easier to repay for some borrowers. However, by extending the term of a loan the total amount of interest paid over the lifetime of the loan is increased.
Top 3 FAQs on Student Loan Consolidation [sponsored by Fundamental w/ logo]
