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It is quite common for a student financial aid package to include several loans. Student may fund their tuition, fees, and room and board with a mixture of federal loans that include the Stafford loan, the FSEOG, Parent PLUS loans, Perkins Loans and others. Many students also obtain private loans. It is possible to consolidate the loans and lower your payment and the interest rate so that monthly payments are more affordable.
Same Amount but Easier Payments!
Students and/or parents may decide to consolidate student loan debt in order to make repayment of the multiple loans more affordable. Since so many students and parents have to take out multiple loans to pay for college, the loan consolidation option can offer big financial benefits. It should be noted that only loans from single borrowers can be consolidated.
The benefits of the student loan consolidation can include the following.
- Can lower the monthly payment by extending the payment terms
- May reduce the total interest amount paid over the life of the loans
- Can lower the average interest rate paid
- Makes loan payment more convenient
- Can choose to consolidate only those loans that bring financial benefit
- No penalties for prepayment
- No fees are charged for federal consolidation loans
You can pick the loans you want to consolidate and roll them into a single loan amount. The interest rate you will pay depends on the lender, your credit rating and the amount of the loan. Depending on your credit rating, a cosigner may or may not be needed.
Choose a Consolidation Program That Suits Your Purposes
There are two student loan consolidation programs. There are consolidation loans offered by private lenders but some have interest rate calculations that are determined by the government if federal loans are involved. There are also federal consolidation loans available through the U.S. Department of Education.
- Federal Loan Consolidation – Allows you to consolidate all federal loans into a single amount and extend the payment period beyond the standard 10 years allowed on the individual loans. The interest rate calculation is defined by the federal government even when a private lender consolidates the loan. The interest rate is the weighted average of the interest rates on your current federal loans to be consolidated with a cap of 8.25%. You can also negotiate for repayment terms that fit your budget.
- Private Consolidation Loans – Allows you to consolidate federal and/or private loans. If you choose to consolidate federal loans in a private consolidation loan you will lose the generous federal terms related to deferment or forbearance. The student loan consolidation companies will work with you to establish an affordable repayment plan that may include fixed monthly payments or repayment on a graduated basis as your income increases. Though there is no cap on the interest rate like there is for the federal consolidation loan, it is still possible to lower the overall interest rate paid. The length of repayment can be extended which can significantly lower your monthly payment.
After graduation, you have a short period of time to begin repaying your loans. That can present financial difficulties when you have accumulated many loans over the length of your college career. Consolidating the loans will lower your monthly payment so you are not faced with large monthly payments as you are beginning your first job.
Understanding Interest Rates
The student loan consolidation rates for interest are calculated by figuring the weighted average of the interest rates on the loans being consolidated. The student loan consolidation rate for federal loans rolled into a single loan is rounded up to the nearest 1/8 of one percent. The maximum interest rate is 8.25%.
The benefit you get from the weighted average of interest rates depends what interest rates you are paying on the individual loans. It is important to understand that the average interest rate may not save you money on interest paid in total unless the lender is willing to adjust the average interest rate downward. There is a cap on the interest rate but there is no minimum rate.
Manage Your Student Loans
The consolidation of a student loan can make your loans much more manageable at a time you are trying to establish yourself financially. Too many students fall behind on their loans and decide to borrow against their credit cards. It is much better to get student loan consolidation help through your local bank or credit union or the federal government.
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