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Consolidating Student Loans PDF Print E-mail
Written by Philip issa   
Student loan consolidation 

There are many reasons to consolidate you federal student loans: lowering monthly payments, getting a better interest rate, and simplifying your debt structure.

But it's also important to understand your options before you consolidate. Are you eligible for deferment, forbearance or even loan forgiveness? Understanding the basics of student loans is an important step in controlling your personal finances.

We'll start here by recaps the differences between federal student loans and private student loans.


Federal vs Private Student Loans:  It’s very important to understand the basic differences between federal and private loans because these differences will affect your student loan consolidation.  Federal student loans are administered by the US Department of Education, whereas private loans are issued by lenders such as a bank.  Federal student loans can be deferred if you return to school and apply for deferment status.  However, private lenders usually do not offer deferment as an option to students returning to school.  Interest paid on federal student loans is deductible on your individual income tax return (subject to various limitations so please consult your tax preparer or the Internal Revenue Code Section 221 for more details).  However, interest incurred on private student loans is generally non-deductible.  Also, loan fees are often more expensive for private student loans than for federal student loans. 

Therefore, make sure that when you consolidate your student loans, that you do not mix your federal student loans with the private student loans.  Once combined the total consolidated loan will be treated as private and you will lose the benefits associated with the federal loans.  

Things to Consider Before You Consolidate Your Federal Student Loans
• Is your monthly payment manageable?  If not, you should look into deferment, forbearance, or consolidation before you end up in default.  See below for more details on these options. 
• Will you obtain a better interest rate by consolidating?  The answer is probably yes, but check with a loan consolidator to be certain.  
• Are interest rates expected to fall?  If so, then you may want to wait before you consolidate.  Contact your loan consolidator for more details.
• Will you be responsible for additional fees under the original loan agreement for not making at least the minimum number of consecutive payments?  To be sure, read the original loan agreements and discuss with your loan consolidator.  Often, the loan consolidation company will assume these fees so that you can consolidate through their company. 
• Please be aware that if you consolidate during your grace period, the consolidated loan will go into repayment as soon as the consolidation process is finalized (which is usually 30 to 60 days from the date of your application) and you will lose the remainder of your grace period. 
• Student loan consolidators usually have a set minimum amount for loan consolidation.  If your student loans are less than that $10,000, then most loan consolidation companies will not consolidate your loans.  

Current Stafford Loan Interest Rate.  The current Stafford loan interest rate is 6.8% FIXED on such loans made on or after July 1, 2006.  Therefore, there may not be a need to consolidate these newer loans.  Stafford loans made between July 1, 1998 and June 30, 2006 and which have not been consolidated are accruing a variable interest of 6.54% for borrowers in deferment or grace period, and a 7.14% variable rate for borrowers that are in the repayment phase of their student loans. 

Your consolidated interest rate is determined by your consolidator and is usually based upon the weighted average of your outstanding loans and a review of your credit history.

Who Can Consolidate?  If you have at least one federal loan (e.g. Stafford Loan, FFEL, Grad Plus, or Perkins loan) and that loan has a variable interest rate, then you may want to consider loan consolidation with a fixed interest rate.  In addition, only students with federal student loans that are in the following stages of repayment are eligible for loan consolidation with fixed interest rates:  loans that are currently in their grace period (i.e. within 6 months of graduation), loans that are in repayment, loans that are in deferment or loans that are in default status.  Therefore, in order to be eligible to consolidate your federal student loans, you cannot be enrolled in school or you must be enrolled at less than half-time status.  Also, the federal loans must have been originally issued at different times and at different interest rates.   

Benefits of Consolidating Your Federal Student Loans:
• You may be able to obtain a more favorable interest rate and reduce your monthly payment.  People consolidate their student loans for the same reason they consolidate their home mortgage and equity line of credit, to obtain a more favorable interest rate.  The federal rate changes July 1st of every year. 
• Increasing the repayment term will lower the monthly payments.  Applicants can increase the term of their student loans up to 30 years.  Thirty years seems like a long time to pay for your schooling, however, many students finish their education and have a student loan liability that matches or exceeds the size of their home mortgage.  Though you’ll have a payment roughly equal to a home mortgage, your education is an excellent investment.  Therefore, consolidating your student loans and obtaining a longer term can help to reduce your monthly costs. 
 Flexible Payment Options.  Loan consolidators usually offer different types of plans for loan repayment.  These flexible payment plans change with the needs of the borrower. 
• One Lender and One Monthly Payment (less paperwork).  Once you consolidate your student loans, you will have fewer monthly checks to write.  In addition, you will receive fewer student loan interest statements (Form 1098-E) at year-end for tax purposes.  

How Do I Consolidate?
You can submit an application for loan consolidation on the web, by phone, or by mail.  For your convenience we have gathered links to a few companies that specialize in federal student loan consolidation.  Please contact one of them for more details.  

How Do Student Loans Affect Your Credit Report?  Too much student debt may hurt your credit score.  Students will often say that student loan debt is considered “good debt.”  However, students with a large amount of student loans (e.g. student loan payments which exceed 8% of your monthly income) can be viewed negatively by creditors. 

Defaulting on your Student Loans Will Hurt Your Credit Score.  Being in default of your student loan is always negative.  Once you go into default status, the balance of the loan becomes due immediately, which means you lose options like deferment and forbearance.  Just because you default on your student loan obligation does not mean that it does not have to be repaid.  In fact, your wages can be garnished and your federal income tax refund can be withheld.  In addition, you will probably not be eligible for other federal loans.  For more details check out the Federal School Aid (FSA) Collections website at:

If you are in default, the FSA outlines the general approach to recovering from defaulted loans.  For more details visit the FSA website at:  Your best bet is to work with a company that specializes in defaulted student loans.  These companies will help you consolidate loans, reduce your interest rate, and manage your monthly payments. 

How To Prevent Defaulting On Your Student Loans:  There are several ways to keep current with your federal student loans.  Consolidating your federal student loans can reduce your interest rate and reduce the term for repayment.  This will hopefully make your loan payment more affordable, which in turn should also help you pay your required payments timely.  Students that return to school for advanced degrees usually qualify for deferment of their federal student loan payments.  Deferment is also available for those experiencing economic hardship, or for men and women in the armed forces.    In addition, ask the loan coordinator if you qualify for forbearance.  Forbearance is a delayed payment of principal on the loan.  This is usually granted when your loan to income ratio is very high (e.g. you are not working much due to injury or other hardships).  In very limited situations, federal student loan debt is cancelled or forgiven. 

Tell Lenders if Your Student Loan is in Deferment.  Students may want to tell a lender that they intend to seek an advanced degree.  This will put the lender on notice that the federal student loans will likely be deferred.  Students must seek permission from the loan administrator first. 

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