Consolidation

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The positive and negative aspects of taking out a Federal Consolidation Loan

You can consolidate while you are in your grace period or in repayment (including during a period of deferment or forbearance).

Positive: Consolidating variable-rate Stafford loans (disbursed before July 1, 2006) while you are in your grace period or in a period of deferment will enable you to receive a lower Consolidation loan interest rate.

Negative: No matter which loans you are consolidating, if you consolidate while you are still in your grace period (the six months after you leave school before you start making payments), you forfeit any remaining grace period and, therefore, interest subsidies paid on your behalf on Stafford loans. You will also have to begin making payments on your Consolidation loan within 60 days of the consolidation.

Consolidating toward the end of your grace period will minimize the negative aspects of consolidating during grace. Talk to your lender about the timing that will work best for your situation.

By consolidating your federal education loans, you can extend your repayment period from 10 to up to 30 years.

Positive: Depending on your total education loan debt, you may be eligible for a repayment period of up to 30 years on your Consolidation loan. Paying the same debt over a longer time means lower monthly payments. If you are unable to make your minimum monthly payment on your current loans, this may be a good option for you.

Negative: Stretching your debt over a longer time also means you'll pay more interest over the life of your Consolidation loan. So you'll actually wind up paying more for your loan in the long run. If you consolidate your loans, the best strategy is to request the shortest repayment period that you can afford that meets minimum payment standards. This will enable you to pay off your loan more quickly and save more interest. And remember, there is no penalty for prepaying your loan.

Consolidation gives you one payment with one lender.

Positive: Consolidation can simplify your life. If you consolidate all of your federal student loans, you will have to make payments to only one lender — less paperwork, less hassle.

Negative: You may give up some benefits that some of your loans currently provide, like deferment eligibility or loan cancellation options. In addition, if you have recently graduated, you may have to give up all or part of your grace period, depending on when you consolidate.

Other things you should be aware of:

Some consolidators may try to get you to consolidate ALL of your debt — including student loans, credit card debt, and any private loans you may have.

How to avoid trouble: Consolidation loans that include debts that are not federal education loans are considered to be "private" loans that generally do not have the same benefits as the Federal Consolidation loan. So be aware that if you consolidate other types of loans or debts with your federal student loans into a private consolidation loan, you risk substantially raising the overall interest rate on the loan, and you may lose some of the deferment eligibility or loan forgiveness options that federal education loans carry.

Many companies offer consolidation and many provide good service, but some may not be able to provide the service you need or want. It is always a good practice to know a lender and its reputation.

How to avoid trouble: Check with your current lender(s) about whether they offer loan consolidation.