Though many students think of consolidation as a way to combine all of their loans to facilitate repayment, please note that this is not always the case. You can consolidate federal loans only with other federal loans, so if you have federal and private loans, you cannot combine them all. The good news is that many lenders provide combined billing, so that your loans with the same lender are listed on one bill and you can make a single monthly payment, thereby greatly facilitating repayment.
You should consider consolidation primarily if you are having difficulty in managing your repayment obligations. Consolidation reduces your monthly payments by increasing your loan repayment period, for as long as 30 years in some cases. But this means you may be paying considerably more in interest charges over the life of the loan if you consolidate. The interest rate on a consolidation loan also may be higher than the rate on loans in standard repayment.
While borrowers normally are discouraged from consolidating their loans because of the resulting increased interest charges, it may be advisable to consider consolidation if you are able to benefit from a fixed versus variable interest rate. For example, in recent years the interest rate cap for federal
Stafford loans (disbursed prior to July 1, 2006) has been 8.25%. However, because the variable repayment rate on these loans during the July 1, 2008 - June 30, 2009 period is 4.21%, borrowers in repayment who consolidate during this period can lock into a long-term fixed interest rate. What borrowers have to decide for themselves is which rate (variable or fixed) will be comparatively lower in the long run. Of course, no one has the answer to what will happen to interest rates in the future, so borrowers will have to use their best judgment. Equally important, there may be some disadvantages to consolidation, including but not limited to the possible loss of on-time repayment incentives, and borrowers should contact their lender(s) and/or the Federal Direct Consolidation Loan Program to obtain specific information. We advise that borrowers then carefully consider their options to ensure that consolidation fits into their long-term financial planning. Finally, please be aware that borrowers have the right and ability to select the consolidation loan provider of their choice.
Note also that the College Cost Reduction and Access Act of 2007 contains a section (401) pertaining to Federal Loan Forgiveness for Public Service Employees. The federal loan forgiveness provisions require borrowers to have borrowed Direct Loans or to have consolidated their federal loans through the Federal Direct Consolidation Program. As such, we advise that borrowers carefully consider the available educational loan programs (private versus Graduate PLUS) to ensure that their individual loan borrowing fits into their long-term financial planning. While borrowing through private educational loan programs may provide better loan terms, it also may limit your options should you decide one day to use the Federal Loan Forgiveness for Public Service Employees program.While we encourage loan borrowers to refer to the detail of the actual legislation in determining all relevant issues, the Financial Aid Office is available to address individual concerns.
