When Should You Consolidate Student Loans?

If you have just graduated from college, the likelihood is that

you are under a large amount of debt in the form of student

loans. You might be wondering if there is any way to reduce the

amount you have to pay. One solution for reducing your

debt is to consolidate your student loans.

Student loan consolidation is similar to refinancing a house on

better terms: although the principal of the loan will not be affected,

the interest rates you can lock in when you consolidate student loans

to a fixed rate can be substantially better, reducing your monthly

payments by up to forty percent. Plus, you might be able to stretch

out your payment time to reduce your monthly payment amount

even further.

The disadvantage when you consolidate student loans during your

initial six-month grace period is that you must start making your

payments right away. This can be difficult if you have not found

a job after graduation, although you can wait until just before the

grace period ends to consolidate, and still receive the lower rates.

Furthermore, once you have consolidated your student loans, you

cannot un-consolidate them again, so make sure to consider your

choice carefully.

How is Interest Calculated When I Consolidate Student Loans?

When you consolidate student loans, your lending company pays off

your government loan and issues you a new loan under its own name.

The typical way to determine the interest rate on the new loan is to

take the average interest rates on all of the student loans, and offer

a new rate that is an eighth of a percentage point higher (up to a

maximum interest rate of 8.25%).

Although agreeing to a higher interest rate might not sound like a

good reason to consolidate student loans, this rate is fixed over

the life of the loan, whereas the government rates will fluctuate.

Since rates are at an all time low right now, locking in the current

rates might be a good idea.

Furthermore, many banks give you ways to bring down the

percentage rates. For example, some lending institutions will

drop the rate by as much as a quarter point if you agree to

automatic deductions from a checking or savings account, whereas

others drop the rates after a certain number of timely

payments. As an additional bonus, there is no penalty for paying

off your consolidated loan early.

When Would You *Not* Want to Consolidate Student Loans?

Before you decide to consolidate student loans, you should

carefully consider your alternatives. For example, did you

realize that it might be possible to have your student loan

cancelled altogether? Student loan forgiveness options include

volunteering, for the Peace Corps for example, or working for the

government in a low-income area as a teacher or

doctor. Cancellation is not possible, however, after you have

consolidated your student loans. If this kind of work

interests you and is available, it could be a better option than

loan consolidation.

Another time to hesitate before you choose to consolidate student

loans is when you are close to finishing your payments.

Stepping up the payments and saving yourself some interest and

the hassle of consolidation might be more advantageous

to you.

Finally, there are loans that you might want to keep open because

they offer special advantages. For example, if you are

considering going back to school and you have a Perkins loan, you

would not want to consolidate that with your other student loans.

The government will pay all interest on Perkins

loans while you are in school, but if you have chosen to

consolidate student loans, you will not be able to receive this

benefit. You could always choose to leave any special

kinds of loans out of the consolidation mix, however.

About the author, Mark Kessler. His website is quickly becoming recognized for it's wealth of information and resources on everything you need to know about student loans. Check it out right away, your bank account depends on it! Go to Student Loans 411.