Student Loan Consolidation - Get the Real Truth

Student loan consolidation is a financial tool that could make it easier for you to repay your student debt. It combines all of your student loans into a single, fixed-rate loan with a longer repayment term and lower monthly payments. The major advantage of debt consolidation is that it frees up money that you may need for living and job-related expenses. However, you will pay more in interest fees over the extended term of the loan. But you can negate this by making larger monthly payments to shorten your repayment period once your financial situation has eased up, since there are generally no penalties for overpayment.

Loans that qualify for Federal student loan consolidation include Stafford loans delivered either through the direct loan program administered by school financial aid departments or given by private lenders through the Federal Family Education Loan (FFEL) program, Perkins loans for college students in exceptional financial need and loans from private lenders such as banks and credit unions, as well as PLUS loans taken out by parents on behalf of their children. Under a new law, however, Stafford loans will be consolidated under the direct loan program and all Federal student loans will be provided through financial aid offices starting July 2010.

You will qualify for Federal student loan consolidation once you have left school, graduated or your enrollment has fallen to less than half-time and have at least one direct or FFEL loan that is in repayment, deferment or default status. If you have defaulted or delinquent debt, you may also avail of debt consolidation provided that you make adequate arrangements with your lender for repayment. Interest rates for consolidated loans are determined using the weighted average of the rates of your loans, rounded off to the nearest one-eighth percent; interest rates, however, are capped at a maximum of 8.25% to 9% and are fixed for the entire term of the loan.

Before availing of student loan consolidation, you should keep in mind that you may lose any benefits you are entitled to under non-consolidated repayment plans, which include interest rate discounts for prompt regular payments, rebates on the principal and even some loan cancellation benefits. Instead of consolidation, you may also consider repayment plans including standard fixed repayment over the term of the loan, extended fixed repayment over a longer term, graduated repayment in which your monthly payments start out low then gradually increase over the term of the loan and income-based repayment in which fixed monthly payments are determined based on income and family size.