Student loan debt consolidation is a special type of debt consolidation. It involves transferring multiple student loans -from either one lender or many lenders- into one large loan. Many students take out multiple loans when they go to school. They may obtain a separate loan for each year of education, or may take out a combination of subsidized loans, unsubsidized loans, and other types of financing.

As a result, students may find themselves with a series of different loans or lenders and multiple monthly payments. Not only can this be confusing to have to send different payments to different lenders, but it can also result in higher monthly payments.

When you consolidate your loans, the lender pays off all your existing loans. You then owe money to that one single lender and you send a single monthly payment.


Loans Eligible For Consolidation

Many different types of student loans are eligible for consolidation. Typically, you can consolidate:

  • Subsidized Stafford loans
  • Unsubsidized Stafford loans
  • Parent Plus Loan
  • Student Plus Loans
  • Graduate Plus Loans
  • Teach Grants
  • Perkins Loans
  • Federal Supplemental Loans
  • Health Education Assistance Loans

There may be other types of loans eligible for consolidation, depending on which method you choose to consolidate with. The major limitation, however, is that private loans are generally not eligible for consolidation.


How to Consolidate

The first step to consolidating your student loans is to find a lender who offers consolidation. Many lenders do offer consolidation, including the Department of Education and Sallie Mae. Private companies also offer consolidation loans for student loans.

When shopping for a lender, make sure you explore all aspects of the loan. The main things to focus on are:

  • Reputation of the lender. Choose a reputable company that has experience within the industry.
  • How your interest rate is calculated. Direct loans and Sallie Mae use a weighted average of the interest rates of your loans at the time of consolidation.
  • Repayment terms. Some lenders will offer you graduated repayment schedules or repayment schedules dependent upon your income. The Department of Education will even allow you to pay a percentage contingent on your income and then forgive any remaining balance left over at the end of a 25 year period. You want the terms to be flexible in case you hit financial strife and need to lower your payments.
  • Incentives. Most student loan consolidation companies offer various incentives, such as a rebate equal to the percentage of the total amount you consolidate or a reduction in interest rate for on-time payments or for setting up automatic debits from your bank account.
  • Forgiveness options: The Department of Education and several major lenders will forgive a portion of your loan for each year you participate in qualified public service. Find out whether you might be eligible for any type of loan forgiveness depending on your occupation.
  • Deferment and forbearance qualifications: With many lenders, you can put your payments on hold through a deferment (in which the interest on subsidized loans is paid by the government) or forbearance (in which you continue to accrue interest on all loans, even subsidized ones). Find out what the qualifications are for these special programs, just in case you run into serious financial trouble or decide to go back to school and need to stop your payments for a time.

Student loan debt consolidation has many benefits. You lock in your interest rate, which can be a great idea if you have variable rate loans and the rate is low. You also have one single payment and may be able to consolidate into a loan that offers more flexible terms. However, consolidation doesn’t make sense for everyone.

If a portion of your loans feature low interest rates but you have a few loans with a higher rate, you may not want to consolidate them all. When the weighted average is taken, it will effectively result in you having a higher interest rate on all your loans. It may be more financially advantageous to just pay off your higher rated loans separately first or to avoid consolidating those loans, making the minimum payments on the lower rate loans while you do so. In addition, if you plan to pay off your loans very quickly, going through the trouble of student loan consolidation may not make sense for you.

Finally, it is important to remember that, under the law, you can consolidate only once. This means once you do it, if interest rates drop, you are locked into the rate you have and cannot take advantage of the lower rates on the market.

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