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Student Loan Consolidation

Article on Student Loan Consolidation

The Federal Loan Consolidation Program was created in 1986, initially with a variable interest rate which has now changed to a fixed interest rate. The program allows students to consolidate their student loans into one single debt, thereby simplifying finances, and extend the period of repayment leading to lower monthly amounts to be paid. The cost of repayment will depend on amounts borrowed, period of repayment and rates.

Which Loans are Eligible?

Both subsidized and unsubsidized loans can be consolidated with the student paying just one monthly amount. Stafford Loans, PLUS Loans, HEAL/HSPL, Nursing School Loans and Perkins Loans can be considered for Student Loan Consolidation and the students can choose a term of 10-30 years.

The interest rates of each individual loan being consolidated are weighted relative to loan value and the consolidated loan interest rate is a weighted average of all of the loans. As the consolidated loan interest rate is locked in for the full term of repayment, it may also make sense for a student to take advantage of current low interest rates rather than be subject to the variability of market forces on their individual loans.

The Payment Schedule

Various payment schedules are available for Student Loan Consolidation including standard payments (fixed over a certain period), graduated payments (increasing over the years), income-based payments (varying with annual earnings), and extended payments for amounts in excess of $30,000 over 20 years or more. Debtors must either be within their post-graduation grace period or have made three full monthly payments as due on each loan to be consolidated. The student must not be in school for more than half-time in respect of the loans being consolidated. Any early repayments go towards the principal so are interest-free and incur no penalty, allowing the student to repay a loan even faster.

The Advantages

Even if the student is managing to meet monthly payments on loans, it may be worth considering consolidation so as to free up funds to pay off other debts with higher interest and penalties, such as credit cards, and private loans. Private credit cannot be consolidated by the program, although services are available to consolidate these personal debts in a similar fashion. By taking advantage of the Student Loan Consolidation Program first the student will have less open lines of credit, resulting in a better credit score with which to approach a private loan consolidation service.

Any Disadvantages?

Unfortunately, special features of some of the individual loans may not be carried over, including grace periods, although deferment, forgiveness and cancellation may still be available under the Federal Student Loan Consolidation Program. Additionally, with a longer term more interest accumulates, leading to a higher amount being repaid over the years.

Student Loan Consolidation can make finances easier and lower cost after graduation allowing graduates more financial freedom to establish themselves in their chosen career and leaving the option of early repayment in times of plenty. Additionally, the interest on federal student loans may be tax deductible in some cases.