Consolidating Your Student Loan

The average college student graduating this year will be responsible for repaying student loans anywhere from $10,000 to $100,000 or more. One of the most important financial decisions these graduates will make is how they pay back their loans.

Protecting Your Credit

Student loan repayment has a direct impact on your credit ratings and, consequently, on your prospects for future loans and financial well-being. If your student loan is more than 85% of your total monthly income, it will be assessed as a negative, and negative credit information can remain on your credit report for up to 7 years. Obviously, it’s important to repay your student loans in a timely and orderly fashion.

Consolidation

One repayment option, the one most consider the best, is to consolidate your loans. There are no application fees, credit checks, or cosigners required for a student loan consolidation. There are, however, many different educational finance organizations offering consolidation and before you apply to any particular agency, it’s important you research the subject of student loan consolidation carefully. Ask questions--once you have signed the papers, it’s a legal and binding contract difficult to get out of.

Benefits of Consolidation

There are many variations on the theme, but what all programs have in common is that they will combine your loans into one. The benefits of this include:

A single, monthly payment to one lender, instead of many payments to various lenders, each due on a different day.

An extended repayment period. The original repayment term for most student loans is 10 years. Extending the terms up to 30 years can significantly reduce monthly loan payments.

An improved credit score. The single, smaller monthly payment for your student loans can reduce your debt/income ratio and improve your credit profile.

The elimination of prepayment penalties. With consolidation, you’ll be able to pay your debt off in full when you want or are able.

Criteria for Consolidation

You are eligible to consolidate your federal student loans when:

You are no longer enrolled in school (defined as being enrolled less than half time)

You are in the grace period of your loan or actively repaying your loan.

You meet the minimum loan requirement. Most consolidation companies require a minimum loan amount, $10,000 is typical.

Federal vs. Private

Do not consolidate federal and private loans together. Interest on federal loans is tax deductible; federal loans can sometimes be forgiven for certain types of service; and you can sometimes defer payments on federal loans if you go back to school. Private loans don't have these advantages. If you have both private and federal loans, consolidate your federal student loans first, then separately consolidate your private loans. The following federal loans are eligible for consolidation:

1. Stafford Loans
2. Perkins Loans
3. Federal Direct Loans
4. Federal Parent Loans for Undergraduate Students (PLUS)
5. Federal Grad PLUS Loans
6. Federal Supplemental Loans for Students (SLS)
7. Federally Insured Student Loans (FISL)
8. National Direct Student Loans (NDSL)
9. Loans for Disadvantaged Students (LDS)
10. Auxiliary Loan to Assist Students (ALAS)
11. Health Education Assistance Loan (HEAL)

The Fine Print

Debt consolidation agencies can assist you in many ways, the most important of which is reducing your interest rates. They will contact your creditors and negotiate a reduction in your rate of interest and your monthly payments. Some can qualify you for further debt reduction programs. But, do not agree to monthly payments you cannot meet. Make sure the amount of your obligation allows you to pay your regular monthly bills.

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