Tips for Student Loan Consolidation

In The United States, most students finance their education spending by taking out student loans. This is fine while you're in college and hitting the books; it's almost as if that debt doesn't even exist. But one day, as you're admiring your impressive diploma, those four or five years of classes are going to catch up with you. Many students are shocked when they receive that first of a set of monthly bills, bills that must be paid over the next 10, 15, or 20 years. Depending on where you went to school, you may have a different lender for each year you were in college, and they'll all start sending you bills about six months after you graduate. The problems are compounded if you've had a gap in the time you were in school, have taken graduate courses, or stretched out the time you were in college, as your interest rates will likely be widely varied.

Don't panic, as there is an easy solution. As Federal Student Loans are guaranteed by the government, lenders follow a fairly standard procedure when it comes to allowing you to go through a process of restructuring your student loans through consolidation. Under consolidation, all of your student loans, for various amounts and at various interest rates, are lumped together, and a weighted interest rate is applied to the overall amount. That is, if you owed $10k in loan 1 at 4% interest, and $10k in loan 2 at 6% interest, your new consolidation loan would be for $20k at 5% interest, which is the weighted average of your loan interest rates. Various calculators exist, such as this calculator on FinAid.org, to help you estimate what your new loan amount and interest rate will be.

There may be subtle differences regarding payment plans and incentives when repaying your consolidation loan, so it's best to check out several sources. Some have different levels of flexibility regarding extended payment plans beyond 20 years, or graduated payment plans in which payments begin small and gradually increase over time. I graduated in 2002 and consolidated my student loans at that time with Citibank at about 4%. I have since started a graduate degree and am now halfway done with it. When finished, I will undergo student loan consolidation again and wrap my new loans together my original consolidation loan, and will likely do this directly with the U.S. Department of Education via a Direct Consolidation Loan.

The process was easy. There isn't much in the realm of qualifying that you need to go through, as these loans are guaranteed by the government. Generally speaking, the only way out of paying for them is either by paying them off completely or dying. You give the consolidator information on your existing loans and they check to make sure you aren't currently in default. The consolidation process takes up to 90 days. Finally, your existing loans are paid off, and your new, usually lower, single monthly payment begins. The Direct Consolidation Loan even sweetens the offer by knocking 0.25% off of the interest rate if you agree to set up automated payments from your checking account,

Tuition is expensive, and isn't getting any cheaper. The usage of student loans to finance higher education isn't going away any time soon. It's nice to know that consolidating the enormous costs of college tuition isn't difficult at all.

Sources:
FinAid.Org. (2010). Loan Consolidation Calculator.
US Department of Education. (2010). Direct Loan Servicing Center.