How can I consolidate my student loans?

Man moving dollar signs into a stack
With the current sluggish economy many student loan borrowers may be finding it difficult to meet monthly payments, especially if they have exhausted their deferment and forbearance options. For many people, student loans are just another bill in a long list of monthly payments ranging from credit cards and insurance to mortgages. For others, they’re a financial burden, threatening to produce damaging effects on borrowers’ credit histories.

Fortunately, there are a number of options available for student loan borrowers who want to consolidate multiple bills into a single, easier monthly payment. Interested borrowers may check their eligibility at the Federal Student Aid website before they submit an application online, through the mail, or even via phone. Additionally borrowers can request an application be mailed to them.

Borrowers are able to consolidate their financing into either an FFEL Consolidations Loan or a Direct Consolidation Loan. A number of changes occur once a borrower decides to consolidate: monthly payments may be lower and the repayment period may be extended.

Prior to consolidating, borrowers should review any benefits they may lose, such as interest rate discounts or principal rebates, since losing these benefits may significantly increase the cost of repaying student loans. Additionally, a Perkins Loan grouped into a consolidated loan would lose its exclusive Perkins Loan Program cancellation benefits. When deciding on whether to consolidate or not, it is important for borrowers to contact their individual lender for more detailed and current information.

If a borrower is currently defaulting on a federal student loan, he or she may still be able to consolidate if they make appropriate repayment arrangements on their existing defaults, or if they agree to repay their potential consolidation loan under either the Income-Contingent or Income-Based Repayment Plans. This is only an option if the borrower’s default is not subject to a judgment or wage garnishment.

Borrowers are able to consolidate during their grace period, once they’ve entered repayment, or during periods of deferment or forbearance. Once a financing agreement is consolidated it becomes a consolidation loan. Its interest rate for either a Direct or FFEL Consolidation Loan remains a fixed rate for the length of the agreement.

The fixed rate is calculated from the weighted average of the interest rates of each individual financing agreement that was consolidated while being rounded upwards to the nearest one-eighth of 1 percentile. Fortunately for borrowers the interest rate on a consolidation will never exceed 8.25 percent.

Borrowers must be aware that there can be significant disadvantages to getting a consolidation loan. A consolidation loan may substantially increase the total cost of repaying a borrower’s student loans. By increasing the amount of time available to repay the now single, albeit larger, student loan, a borrower will obviously be paying more interest for a longer period of time.