Student Loan Consolidation and How It Could Help You

Want to lower your monthly student loan payments? Then consider consolidation. Learn more about consolidating and why it's a smart step to take postgrad.

Student loans can be a scary concept when you don't know much about them. But they're a common way to make college more affordable—and there are ways to make your life easier when it's time to pay back the money you owe for college. One way to simplify your payments is through student loan consolidation. Find out how you could lower your monthly payments on your student loans with this strategy now. 

Types of student loans

First, you need to know about the different types of student loans that are available. Let’s start with the Federal Perkins Loan. This type of loan is generally granted by your college’s financial aid office. Since this is a need-based loan, the university’s financial aid office must determine who qualifies for the loan and how much they will receive. Universities only have a limited amount of funds to distribute, however, so these loans are awarded on a very selective basis. The majority of college students have Federal Stafford Loans instead. This is the most common loan available to both undergraduate and graduate students. If a Stafford Loan is subsidized, the federal government pays your accrued interest while you’re in school and during the grace period after graduation. If your Stafford is unsubsidized, however, you’ll be footing the entire bill. Lastly, you may have one or several private education loans. There are a variety of lenders that provide private education loans. Most banks and financial institutions offer private student loans to help supplement the costs that other financial aid resources won’t cover.

Related: Types of Student Loans Explained: Federal vs. Private 

Consolidating your loans

Now that you better understand what kind of loan(s) there are, you’re probably wondering what’s next. Pay off time! It may sound daunting to have to pay back all those loans, but don’t even think about attempting to dodge those bills. Not paying your loans back will cause your credit rating to plummet. And remember, declaring bankruptcy is not an option! Student loans are immune to bankruptcy. You may also face IRS penalties and possible garnishment of wages if you hold off on payment—so make those monthly payments on time! What’s a good plan of action when beginning to repay your loans? A smart move is to look into consolidating your existing loans now while interest rates are still low.

What is consolidation?

Consolidation involves refinancing one or more of your student loans. The original balance is paid in full, and a new loan is originated for the combined amount and for a new term—all with a low fixed interest rate. Consolidation loans often reduce the size of your monthly payment by extending the term of your loan beyond the 10-year repayment plan that is standard with federal loans. Depending on the loan amount, the term of the loan can be extended from 12–30 years. The reduced monthly payment may make the loan easier to repay. However, by extending the term of a loan the total amount of interest paid is increased. You can always make more than the minimum payment each month to cut the repayment period down and reduce the amount of interest paid.

Get a head start

Which loans should you consolidate? You can consolidate Perkins, Stafford, and even some previously consolidated loans. Unfortunately, you cannot consolidate private loans that are not federally guaranteed under the federal program. Also, most lenders will only consolidate loans for students with loan balances of at least $7,500. For most students, this threshold won’t be a problem.

Related: What You Need to Know About Taking on Student Loans 

Benefits of consolidating your loans

What are the benefits of consolidating your loan(s)? The main benefit of consolidation is that it allows you to lock in a low fixed interest rate for the life of the loan. Understand though, that not everyone gets the lowest rate on consolidation. While some can lock in a very low rate close to 3.5%, others may pay slightly more depending on the original loan rates. So check with your lenders for information on how much your rate will decrease. Each website has online calculators, and you can even apply for a consolidation loan online. Note also that there is no fee for you, the borrower, to consolidate.

Another benefit to consolidation is that now you only have to make one monthly payment and to only one lender—saving you a headache each month from sorting out to whom and what you owe. There are also added bonuses, for instance, many lenders offer interest rate and payment reductions if you pay on time over a period of months and/or have your monthly payments automatically withdrawn from your checking or savings account.

Related: 5 Potential Downsides to Refinancing Your Student Loans 

Do a little homework and in the end you’ll save yourself a nice sum of cash for consolidating your loans. The place to start is studentaid.gov, where you can learn more about the benefits of consolidation and apply online. Start the process now so you can relax, get some sleep, and focus on what’s really important: your first real job!

Reprinted with permission from Graduating Engineer & Computer Careers Magazine. To learn more about student loans and how to repay them, check out the Financial Aid section of CollegeXpress.com. 

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