How to consolidate student loans: private and federal

Lately, the National Postsecondary Student Aid Study shows that two-thirds of Bachelor’s degree students graduated with debt. The average debt reported was $23,186. A survey conducted by the National Association of Colleges and Employers found that only 19.7 percent of the college graduates were employed at the time of graduation. Experienced workers have flooded the market because of lay-offs, creating stiffer competition and decreasing entry-level compensation. Graduates with heavy student loan debt are finding that debt more difficult to repay.

Why Consider Student Loan Consolidation?

Loan consolidation, as with any financial decision, should be carefully considered with all the options fully weighed before making a decision. Once a consolidation loan is made, it cannot be reversed, and the borrower must abide by the terms of the new loan until it is repaid. A borrower should consolidate only when a long-term solution is needed for relief of high payment demands, or when a variable rate can be converted to a fixed rate.

Forbearance, deferment and income sensitive payments are options for short-term relief of federal student loan debt when a student is unable to comply with repayment terms. Do not consolidate federal loan debt into a private loan because the federal loans have several protections and benefits in place for the borrower that private loans do not offer.

Benefits of Consolidating Student Loans

A consolidated student loan can be a practical solution for a graduate with multiple loans, each with different terms, fees, and interest rates. One loan payment each month is easier to track than several payments. Since the consolidated loan is spread over a longer term, the payment is often less than the sum of the individual loan payments, saving the borrower up to 60 percent each month. The interest rate for a federal consolidation loan is fixed and is an average of the student’s student loan debt. The borrower should consider all the benefits of consolidating student loans.

Repayment period ranges from 10 to 30 years
Interest rate is fixed and will be a maximum of 8.25 percent
No application fees or prepayment penalties are charged
No credit check required, except for Direct Loan consolidation PLUS borrowers
Lower monthly payments

Disadvantages of Student Loans Consolidation

Student loan consolidation is not right for every borrower. The term for a consolidation loan is longer than the term for the smaller amount loans, so the monthly payment is often less than the sum of the lesser payment amounts. A borrower seeking short-term lower monthly payments because of a temporary situation should speak with his lender about loan modification options and payment deferment that may help for a specified period. The borrower should be aware of the disadvantages of student loan consolidation.

Extended loan term means that many more payments will be made
Total cost of the loan will be drastically higher with a longer repayment period
Loan benefits such as interest rate discounts, deferment, rebates, income sensitive payments and loan cancellation options may not be available for consolidated loans
FFEL Consolidation Loan borrowers forfeit any remaining grace period on their loans
Borrow must begin repaying the consolidation loan usually within 60 days

Federal Student Loan Consolidation

All Federal Family Education Loans (FFEL) and Direct Stafford Loans, and most other federal education loans, can be consolidated as long as the borrower is no longer in school and the loan is in good standing. Delinquent borrowers must contact their lenders for options that may be available, such as deferment or forbearance, to bring their accounts current before consolidation.

The first step to consolidate federal student loans is to gather all existing loan documentation. The borrower will need balances, current interest rates, and term of the loan. Calculate the total cost of the loan by multiplying the payments by the term. For example, a loan payment of $50 per month for 5 years (60 months) has a total cost of $3000 ($50 x 60). Do this for each loan and then add these totals to get the total cost of the individual loans to compare to the total cost of the consolidated loan. Calculate the sum of the monthly payments to each of these loans to compare with consolidated loan monthly payment quote.

When the payments and total cost have been calculated for the current loans, the student loan borrower should contact his existing lenders to discuss consolidation. Get several quotes, but since the government rigorously regulates federal consolidated loans, each institution will likely provide the borrower with similar quotes. Ask the lender directly what benefits the borrow forfeits in giving up the individual loans in favor of one consolidated loan. Compare the quote to the cost and terms of the current group of loans. If the consolidated loan is the better option, sign the documents and return them to the lender. The borrower is not under any obligation to accept the new loan.

Private Student Loan Consolidation

Unfortunately, education is a large expense. After scholarships, grants, and federal loans, a student is often left with additional expenses, and a private education loan can cover these remaining expenses. However, the terms for a private student loan are rarely as favorable as a federal loan program. A borrower with private education loans should get quotes from several lenders to compare, and never combine federal loans into a private consolidation loan.

According to the survey many lenders abandoned the student loan market and so a private student consolidation loan may be more difficult to obtain. The lender sets the interest rates and terms for private consolidation loans based on the borrowers’ credit score, and the lender may also charge additional fees for these loans such as origination fees and prepayment penalties. If a borrower has difficulty securing an acceptable consolidation of student loan debt, a home equity loan may be a suitable alternative.