Many students find that it is in their best interest to consolidate their student loans after they graduate from college. Generally, they seek out debt consolidation as a means to reduce monthly loan payments, get a lower APR, or move to a new lender.
Because there are two different types of student loan lenders—public and private—there are two different methodologies and rationales for consolidating student loans. Typically, public and private student loans are kept separate and are not consolidated. However, many public loans may be consolidated into one, larger public loan just as many private loans can be consolidated into a single, but larger, private loan.
Consolidating Federal Loans
Federal student loans made through Direct Loans can be consolidated easily into a fixed monthly payment plan. There are several different repayment plans for Direct Loans, and it is often the case that the choices for your consolidation of “Direct Loans” debts are few:
Graduated plan – This payment plan has become a favorite among recent graduates. With a graduated plan, the payments start low (equal roughly to interest plus only a few dollars of principle) before rising each year for 10-30 years. The goal is to allow students to take an internship or look for higher paying jobs once they exit school, and allow them to pay more as they earn more experience in their field, and thus have more money to pay back to Direct Loans.
Extended repayment – Direct Loan borrowers with debt loads greater than $30,000 can extend their loan payments for as long as 25 years. This can be completed with a fixed monthly payment option, where you pay the same monthly payment from start to finish (a minimum of $50 per month) or with a graduated monthly payment. The graduated payment begins at $50, before rising in a linear scale to complete the payoff within 25 years.
Income-based repayment and consolidation – Spread over 25 years, your monthly payments will adjust based on 10% of your income. At no time will payments be higher than your income, and it is possible that, depending on what you study, you will have some of your loans written off. This is the case for teachers, nurses, firefighters, police offers, and other workers who go on to work in public service.
Rates for all repayments are set by Congress. At present, the rate for standard Stafford loans is 6.2% per year. Unfortunately, subsidized loans cannot be consolidated without a higher interest rate. Do not consolidate subsidized debt unless it is an absolute necessity.
Private Student Loan Consolidation
Private student loan consolidation plans are easier to understand, and they are less rigid in nature. Compared to the government, individual private lenders are more willing to craft up a specialized contract for your student loans, and many are willing to modify payment terms to make the consolidation loan a perfect fit for your finances.
One of the most common reasons that private student loans are consolidated is to turn a variable rate loan (or many variable rate loans) into a single, fixed-rate loan. It is typically the case that lenders give private loans only with a variable rate, however they are usually willing to fix these rates for the life of the loan after the student graduates, or has consistently made monthly payments.
Another reason for student loan consolidation for private loans is to remove the burden on a cosigner. Consigning for student loan debt is one of the biggest risks that someone else could take for you, since student loan debt cannot be erased. You should always seek to remove your cosigner as soon as possible, since your ability to repay affects their finances. Also, realize that even if you are a good borrower, and you do make your payments on time, your cosigner won’t be able to borrow as easily after creditors find out that he or she is a cosigner on your loan. This may affect their ability to buy new cars, refinance a mortgage, or even go to school themselves. Thus, try to do the right thing and take a cosigner off your loan as soon as possible—and definitely thank them for cosigning in the first place!
Private student loans can often be consolidated for less than 2% over the prime rate, or LIBOR rate. You can access the prime rate by looking in the Wall Street Journal, which publishes this rate daily online and in the printed newspaper. Alternatively, lenders should be able to provide you with the prime rate upon request.