Consolidation of student loans

For recent college graduates or those nearing graduation, student loans can be a heavy financial burden.  It will soon be time to begin repayment.  A question many people have is whether they should consolidate the loans or not.

All student loans fall into one of two categories, federal loan or private loans.  Loans issued by the federal government include PLUS, Perkins and Stafford.  Loans issued by a bank or other financial institution are of course private.  Since federal loans and private loans have different rules for interest rates, it’s often best not to consolidate them if you can avoid it.  Federal loans also offer more protection to the borrower in the form of deferment and cancellation that will likely be lost if you consolidate them with private loans.

Consolidation usually works by setting the new interest rate equal to the average of all included loans, with an additional 1/8% tacked on for good measure.  When consolidating, the loan company will often offer incentives in the form of lower interest for such things as automatic withdrawals and paying the loan on time for several consecutive months.

As of the beginning of 2009, students can base their repayment of student loans based off their income.  Loan companies can only charge you up to a certain percent of your current income.  The rate is calculated based on the difference in your income and 150% of the poverty level.  Any debt you have not paid off in 25 years will be cancelled.

Once you have decided that consolidation is the right choice for you, the next step is to shop around.  Search for discounts, the lowest rates, fewest penalties, etc.  There are many institutions and companies that offer loan consolidation and they all compete with one another.  Use this to your advantage.  Be especially wary of companies that charge a penalty for early repayment of a loan.

Several online sites can assist you in finding the best option and rates for loan consolidation.  Studentloanconsolidator.com, loanconsolidator.ed.gov, chasestudentloans.com and studentloan.com are all excellent resources you should take advantage of before making your final decision.  Repaying a loan can be a long road so make sure you are happy with the lender before signing the papers.

Many individual states also offer loan consolidation programs.  Explore these options if they are available and weigh them against what the private lenders are offering you.  Often the state will give you the best rate, but not always.  Do your homework and plan ahead.

The biggest benefit of student loan consolidation is the ability to make one lower payment each month.  Remember that in the long run you will end up paying more in the form of interest.  The convenience factor may also make consolidation more attractive to some.  this is especially true if you have loans with similar interest rates from numerous sources.  There is no one right answer and only you and your financial advisor can decide your best option.  Congratulations of graduating college.  Welcome to the real world.