How To Consolidate Your Student Loans

by David

college, loans, student loans and financial aid

Do you get all the junk mail telling you it’s the best time to consolidate your student loans?

If you’re like me, you probably just toss them straight into the trash can.

However, while most of those letters are junk, it can still be very beneficial to consolidate your students loans.

Below I’ll discuss why you should consolidate your loans, as well as how to consolidate your loans.


Reasons To Consolidate Your Student Loans

1) INTEREST RATES – If you have federal Stafford loans or any other types of loans that have a variable interest rate, consolidating your loans allow you to have a fixed interest rate over the life of your loan. This can be very beneficial when interest rates are increasing (as they currently are).

However, if you think interest rates will be decreasing, then you may want to hold off for a little while.

Student loan consolidations also have a cap on the interest rate charged. Lenders cannot charge an interest rate above 8.25%.

Lenders determine the interest rate they charge based on the weighted average of all your current student loans. Then they can round to the nearest one-eighth of one percent. Lenders also can give incentives to consolidate, such as 1% off your interest rate or an additional 1/2% off if you use automatic withdrawal.

2) SINGLE PAYMENTS – If you have multiple student loans, then of course you will have multiple bills to pay, multiple people to call when something goes wrong, etc. However, when you consolidate your student loans, all your loans will be wrapped up into one single payment. This makes things a whole lot easier to keep track of.

3) LONGER REPAYMENT PERIODS – As mentioned in the other student loan article, with federal student loans and many non-federal loans, there are set repayment periods such as 10 years for the Stafford loans.

However, when you consolidate your loans, you can choose the repayment period of your loans, up to 30 years. Take note: while this will decrease the amount of money you pay each month, over the long term it will actually increase the amount of money you pay because you will be paying more in interest.

4) REPAYMENT PLAN OPTIONS – In addition to offering longer repayment options, loan consolidation also allows you to choose between different types of repayment plans such as:

  • Graduated repayment plans – pay less in the beginning and have your payment amount gradually increase
  • Income contingent plans – This type of plan is contingent on you earning an income. No income = no payment. (This is for direct consolidation loans only and has several restrictions.)
  • Income sensitive loans – Your payment amount is based on your income. So as your income grows, so does your monthly payment.

5) NO FEES TO CONSOLIDATE – You may be thinking there is a catch to consolidate, some sort of fee up front – but there’s not (and there shouldn’t be!). One warning – stay clear of any consolidation companies that ask you to pay anything up front, even if they offer a lower interest rate.



How To Consolidate Your Student Loans
There are several options for finding the right lender to consolidate with. While you can only consolidate with the Department of Education if you have only federal loans, anyone can consolidate with private lenders such as many of the large banks in the country. Sallie Mae is another lender that specializes in student loans.

The main point to focus on when choosing a lender is the interest rate. Lenders can be somewhat flexible and getting the best rate is always important. Additionally, determine whether the repayment period is important to you and use that as a deciding factor.

Lenders will sometimes require a minimum loan balance. Before you spend a lot of time looking into a lender, make sure your loan balance is high enough.

Finally, and most importantly, DO YOUR RESEARCH!! Look into several different lenders and compare interest rates as well as all the other things mentioned above. As I said before, consolidating student loans can be beneficial, as long as you have the right lender.