What is student loan consolidation and how does it work?

Q: I'm graduating from college in June and have been hearing a lot about loan consolidation. What is student loan consolidation and how does it work? Do you recommend this method of repayment for student loans?

A: Essentially, you can consolidate multiple federal student loans with variable interest rates into one fixed-rate loan and extend your repayment period from 10 years up to 30 years, depending on where you go. The interest rate for your consolidated loan is based on a weighted average of the underlying loans, rounded up to the nearest one-eighth percentage point or 8.25%, whichever is less. The determined interest rate is locked in for the life of the loan.

Now is a great time to consider consolidation. Interest rates are at low levels for federal student loans, some as low as 2.85%. Rates are not likely to drop any lower. Many loan consolidators also offer breaks. You could potentially reduce your interest rate another 1.25% with lender incentives for on-time payments.

Consolidation is not the best option for everyone, so do some research before making a decision. Not all institutions offer student loan consolidation. Talk to various lenders, starting with your local credit union. If they do not offer student loan consolidation, search online for lenders and be assured that once you graduate they will find you. Always make sure that you clearly understand the terms of the loan.

• The federal government allows a six-month grace period from the day you graduate before loan payments must begin. If you choose to consolidate during this time, your grace period will be waived and you will have to start making payments immediately. However, some of the lowest rates are offered during this grace period.
• Once you consolidate, the interest rate is locked in for the life of the loan.
• Consolidate federal and private loans separately. Unlike private loans, interest on federal loans may be tax deductible, and you might be able to defer payments if you go back to school.

Helpful Resource: schoolwork.org

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