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MAIN Arrow to Your MoneyPersonal Finance Arrow to College AidCollege Aid Arrow to Financial Aid 101Financial Aid 101

The Facts About
Student Loan Consolidation

student loan consolidationStudent loans are a great source of financial aid for students who need help paying for their education. Unfortunately, students often leave college with burdensome debt. In addition, they often have multiple loans from different lenders, meaning they are writing more than one loan repayment check each month. One solution to this problem is loan consolidation.

What is loan consolidation?
Loan consolidation means bundling all your student loans into one single loan... with one lender and one repayment plan.

To understand loan consolidation, think of it as the same sort of payment option as refinancing a home mortgage. When you consolidate your student loans, the balances of your existing student loans are paid off and the amount you owe on each of the loans is rolled over into one big consolidated loan. The end result is that you have only one student loan and only one set of payments to make - or deferment forms to complete!

Both students and their parents can consolidate loans.

UPDATE AS OF 2013: If your student loan debt is high relative to your income, you may qualify for the Pay As You Earn Repayment Plan.

Most Direct Loans—except for Direct PLUS Loans for parents and Direct Consolidation Loans that repaid PLUS loans for parents—are eligible for Pay As You Earn.

The Pay As You Earn Repayment Plan helps keep your monthly student loan payments affordable, and usually has the lowest monthly payment amount of the repayment plans that are based on your income. If you need to make lower monthly payments, this plan may be for you.

Should I consolidate my loans?
Loan consolidation offers many benefits:

- Locks in a fixed, usually lower, interest rate for the term of your loan, potentially saving you thousands of dollars (depending on the interest rates of your original loans)
- Lowers your monthly payment
- Combines all of your student loan payments into one monthly bill

In addition, consolidated loans have flexible repayment options and no fees, charges, or prepayment penalties. There are also no credit checks or co-signers required.

You should consider consolidating your loans if the consolidation loan would have a lower interest rate than your current loans, particularly if you are having trouble making you monthly payments. However, if you are close to paying off your existing loans, consolidation may not be worth it.

What will the interest rate for the consolidated loan be?

Your interest rate on your consolidation loan depends on when you took out your original student loans or parent loans and what the interest rate is on each loan.

The interest rate for your consolidated loan is calculated by averaging the interest rate of all the loans being consolidated and then rounding up to the next one-eighth of one percent. The maximum interest rate is 8.25 percent.

To figure your interest rate, visit for an online calculator that will do the math for you.

How much can I save?
How much you save by consolidating loans depends on what interest rate you get and whether you choose to extend your repayment plan.

According to Sallie Mae, the leading provider of student loans in the United States, consolidating student loans can reduce monthly payments by up to 54 percent. However, the only way to reduce your payment this much is to extend your repayment plan.

Normally, you have to repay your student loans within 10 years. With a consolidation loan you can extend your repayment plan all the way up to 30 years, depending on the amount you're consolidating.

Remember that if you choose to extend your repayment term, it will take longer to pay off your overall debt and you'll pay more in interest. There are no preypayment penalties, so you can always choose to pay off the loan early.

Am I eligible to consolidate my loans?
In order to consolidate your loans, you must meet the following criteria:

- You are in your six-month grace period following graduation
- or you have started repaying your loans
- You have more than one lender
- You have not already consolidated your student loans, or since consolidation you have gone back to school and acquired new student loans

The following types of loans can be consolidated:

  • Direct Subsidized and Unsubsidized Loans

  • Federal Subsidized and Unsubsidized Federal Stafford Loans

  • Direct PLUS Loans and Federal PLUS Loans

  • Direct Consolidation Loans and Federal Consolidation Loans

  • Guaranteed Student Loans

  • Federal Insured Student Loans

  • Federal Supplemental Loans for Students

  • Auxiliary Loans to Assist Students

  • Federal Perkins Loans

  • National Direct Student Loans

  • National Defense Student Loans

  • Health Education Assistance Loans

  • Health Professions Student Loans

  • Loans for Disadvantaged Students

  • Nursing Student Loans

    Where can I get a consolidation loan?
    You can consolidate your loans through any bank or credit union that participates in the Federal Family Education Loan Program, or directly from the finacial aid section of the U.S. Department of Education. The loan terms and conditions are generally the same, regardless of where you consolidate. You may want to check first with the lenders that hold your current loans.

    If all your loans are with one lender, you must consolidate with that lender.

    If you decide to consolidate your student loans, remember that you can only do so once unless you go back to school and take out more loans. Therefore, you will want to make sure you get the best deal the first time. The interest rate will be the same from all lenders, but some lenders may offer future rate discounts for prompt payment and a discount for having monthly payments directly debited from your account.

    Can my spouse and I consolidate our loans together?
    You can consolidate your loans together, but it is not a good idea for a couple of reasons:

    • Both of you will always be responsible to repay the loan, even if you later separate or divorce

    • If you need to defer payment on the loan, both of you will have to meet the deferment criteria

    When should I consolidate my loans?
    You can consolidate your loans any time during your six-month grace period or after you have started repaying your loans. If you consolidate during your grace period, you may be able to get a lower interest rate. However, since you will lose the rest of the grace period, it is a good idea to wait until the fifth month of the grace period before consolidating. The consolidation process usually takes 30-45 days.

    More about student loan consolidation around the Web:

    Student-Loan Consolidation Programs - College Board

    Federal student loan consolidation - Wikipedia


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