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Student Loan Consolidation

Is Student Loan Consolidation Right For You?

Student loan consolidation combines many parent or student loans into just one bigger loan that comes from a single lender, which is used to pay off the multiple balances on the original loans. The idea of a student loan consolidation is similar to that of refinancing a mortgage. Student loan consolidation services are available for the majority of federal loans. This includes such as unsubsidized and subsidized Direct and FFEL Stafford Loans, Supplemental Loans for Students (SLS), Direct and FFEL PLUS Loans, Health Education Assistance Loans, Federal Nursing Loans, Federal Perkins Loans, and certain existing consolidation loans. Some lenders also provide various private loan consolidation services for private loans as well.

Restrictions on Student Loan Consolidation

Almost all federal education loans can be consolidated. However, there are a few set restrictions on student loan consolidation.

First, student loan consolidation can only be used once. In order for an existing consolidation loan to be eligible for reconsolidation, more loans must be added that were not previously consolidated into the original student consolidation loan. Since 2006, an individual consolidated loan could not be consolidated by itself.

It is important to note that when a consolidated loan is reconsolidated, this does not relock the rates on the new consolidation loan. Instead, the consolidation loan is looked at as a fixed rate loan when calculating the weighted average interest rate that is used to find the new interest rate for the consolidation loan.

The new restrictions regarding consolidating a consolidation loan hinder the ability to use consolidation when switching lenders. Typically, loans can consolidate once, near the end of the grace period given for the loan or once the original loan enters repayment. It is then locked into that specific lender for the lifespan of the loan. In order to preserve the ability to use student loan consolidation services in the future when switching lenders, it is best to exclude at least one loan from the consolidation in order for eligibility for reconsolidation.

Repayment Plans under Student Loan Consolidation

Student loan Consolidation allows access to several different repayment plans aside from the standard 10-year repayment plan. Some of these include income contingent repayment for direct loans, graduated repayment, extended repayment, and income sensitive repayment for FFEL loans.

Student loan consolidation also often reduces the amount of the monthly payment by extending the repayment period of the loan beyond the 10-years as stated in the terms of student federal loans. Depending on the amount of the loan, the repayment period of the loan can be extended anywhere from 12 years to 30 years. The lowered monthly payment may make it easier on the borrower to repay the loan. However, extension of the repayment period results in an increase of the total interest paid over the loan’s lifetime.

In certain situations, student loan consolidation may result in a decrease of a loan’s monthly payment without having to extend the loan’s term beyond the original 10 years, for example with shorter-term loans. The sum of the interest paid will increase unless the same monthly payments are made, resulting in a decrease in total interest paid. 

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