The new lender will purchase your outstanding student loans and become your primary lender.
Federal student loans as well as private student loans are eligible for consolidation. Consolidation offers a lower monthly payment and the convenience of having one single monthly payment at a fixed rate.
In addition, the amount of time to repay the consolidated loan may be extended beyond what was available in the separate loan programs. The fact that you can save money would conceivably be reason enough to consolidate student loans. But there are pros and cons to consolidating student loans. Below are a few pros and cons worth looking at in making a decision:
Consolidation also gives you the benefit of locking in a fixed rate for the life of the loan. You can save potentially thousands of dollars in interest fees over the life of the loans by locking in fixed interest rates.
Increased Cash in your pockets.
The money you save by locking in a low fixed interest rate will put more money into your hands.
Lower monthly payments.
You can lower your monthly payments by extending the terms of your loan. Student loan forbearance or deferment can even lower your interest rates.
There are no prepayment penalties meaning that if you decide to pay off your loan early there will not be any additional fees or charges to penalize you.
Student loan consolidation interest is tax-deductible. A special deduction is allowed for paying interest on a student loan. The student loan interest deduction is taken as an adjustment to income.
Increase credit scores.
When you consolidate your student loans you decrease the amount of creditors you owe on your credit reports.
The amount of debt you carry accounts for 30% of our credit score and by decreasing the number of creditors you owe, you can potentially raise your score over time by having less debt.
Fluctuating interest rate.
Getting a fixed rate when you consolidate your student loans is great if interest rates increase; however, if they decrease, you are stuck paying the fixed interest rate agreed upon at the time of consolidation.
Increased payback amount.
Because you are extending the life of the loan when consolidating, you may wind up paying back more overall. But keep in mind, student loan interest is tax deductible.
Average interest rate.
The interest rate of your consolidated loans will be calculated as a weighted average of your current loan rates and then rounded up to the nearest 1/8, but will not exceed 8.25%. Therefore, you may consider excluding the higher rate loans in order to keep your interest rate as low as possible. You do not have to consolidate all of your student loans.
Stafford Loans in 2007.
Students who graduated in 2007 or after will pay a fixed rate interest; therefore, consolidating may not be necessary in order to get the lowest payment.
Consolidating federal loans into a private loan.
Borrowers should avoid consolidating federal loans into a private loan as significant benefits will be lost. Private loans will not offer the advantages of deferment, student loan forgiveness, or forbearance.
Private Student Loans.
If you have private student loans in your portfolio you may be limited in consolidation options. Your credit score will determine if you get a new loan and the interest rate will probably not be fixed. If the prime rate rises, the rate on your loan will also rise.
Additionally, there is a limited number of lenders offering student loan consolidation. According to FinAid.org, Chase, Wells Fargo, Student Loan Network and NextStudent are the only private lenders offering consolidation.
Federal Loans Eligible for Student Loan Consolidation
- Federal Subsidized and Unsubsidized Federal Stafford Loans
- Federal Direct Loans
- Federal Perkins Loans
- Federal Supplemental Loans for Students (SLS)
- Federally Insured Student Loans (FISL)
- National Direct Student Loans (NDSL)
- Federal Parent Loans for Undergraduate Students (PLUS)
- Loans for Disadvantaged Students (LDS)
- Auxiliary Loan to Assist Students (ALAS)
- Health Education Assistance Loan (HEAL)
- Direct Subsidized and Unsubsidized Loans
- Guaranteed Student Loans
- Health Professions Student Loans
- Loans for Disadvantaged Students
- Nursing Student Loans