Loan Consolidation-The Facts
Consolidating your existing student loans can make repaying them simpler and more manageable with just:
- one monthly payment,
- a fixed interest rate, and
- an extended repayment term from 12 to 30 years, depending on the total end-loan debt.
The interest rate on a consolidation loan may be lower than what you're currently paying on one or more of your loans. 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. However, by extending the term of a loan the total amount of interest paid is most often increased. In certain circumstances (for example, when one or more of the loans was being repaid in less than 10 years because of minimum payment requirements), a consolidation loan may decrease the monthly payment without extending the overall loan term beyond 10 years. In effect, the shorter-term loan is being extended to 10 years. The total amount of interest paid will increase unless you continue to pay the same monthly payment as before, in which case the total amount of interest paid will decrease.
Consolidation loans are fixed for the entire time you are repaying the loan at the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent, but can be no higher than 8.25 percent. By law, the interest rate will never exceed 8.25 percent. Some former graduate students have found it necessary to consolidate their educational loans when applying for a mortgage on a house.
The benefits of consolidation differ for each borrower. Get all the facts first before opting for a consolidation loan. You may be relinquishing your deferment or repayment options. Your signature on the consolidation application and promissory note obligates you to the terms of the new loan.
Both the Direct Loan Program and the Federal Family Education Loan Program (FFELP) offer consolidation loans. Direct Consolidation Loans are available from the U.S. Department of Education. FFELP Consolidation Loans are available from participating lenders such as banks, credit unions, and savings and loan associations.
If you're in default on a federal education loan, you may receive a consolidation loan from some lenders and the Direct Program if certain conditions are met. Check with your lender to determine if you are eligible.
Note that a lender may not refuse to consolidate your loans because of:
- the number or type of loans you want to consolidate.
- the type of school you attended.
- the interest rate you would be charged on a consolidation loan.
- the types of repayment schedules available to you.
The benefits of consolidation differ for each borrower. In order to offset increased interest expense, you can make larger payments, applying the extra as an early payment on principal.
Get all the facts first before opting for a consolidation loan. You may be relinquishing your deferment or repayment options. Your signature on the consolidation application and promissory note obligates you to the terms of the new loan. You don't have to consolidate all your loans, but any loans you list on the application will be consolidated. To learn more, consult with your lender, financial advisor or financial aid office.
Speak with a professional highly trained consolidation counselors by calling 800-741-4704 and determine if and when consolidation is right for you.