If you check your credit report after borrowing money to finance your education,
you may be surprised to find numerous entries--an entry for each semester,
sometimes with more than one lender. This can seem overwhelming, especially
when you consider that each separate loan has a different payment amount
and they may not all be serviced by the same company.
To simplify repayment, many borrowers choose to consolidate their student
loans. A student loan consolidation is basically a refinance of all of
your student loan debt. You borrow money from one lender to pay off smaller
loans so that you are left with one loan and one monthly payment.
If you have private student loans, your repayment options are limited to
the contract you signed and the lender's policies. However, federal
student loans are funded or guaranteed by the U.S. Department of Education
rather than a bank or financial institution and have more flexible repayment
options, as well as cancellation based on death or disability of the borrower.
There are many private companies that will consolidate your federal and
private student loans, but it is important to look at the repayment and
loan cancellation options. You'll want to make sure that you are not
giving up the federal loan benefits by consolidating with a private company.
Here are some things to think about before consolidating your loans:
- Will the consolidation result in you paying more money in the long run?
Some consolidation loans allow you to stretch the repayment for up to
30 years. Enter your debt information into an online loan calculator to
determine how much interest you will be paying over the life of the loan.
Then, see how much money you will save if you pay $10, $50, or $100 more
each month. Paying a little more each month, may save you thousands over
the life of the loan!
- Is your interest rate variable or fixed? Variable interest rates adjust
over time. This may be good for you if interest rates remain low; however,
will you be able to afford the payments if your interest rate doubles?
A fixed interest rate means you pay the same interest rate for the life
of the loan; it cannot change after you sign the loan documents.
- Some companies offer to let you consolidate your loans with your spouse's
student loans. Is it necessary to obligate someone else to your debt?
Is it a smart move for you to obligate yourself to someone else's
debt? If one spouse dies, would his or her share of the debt have been
cancelled if you had not jointly consolidated?
- Are you eligible for the Teacher Loan Forgiveness or Public Service Loan
Forgiveness programs offered by Direct Loans? If you meet the program
requirements, you may not have to pay a portion of your loans.
- What options are available if you face a financial hardship? Can you payments
be lowered or postponed if your income is reduced?
For more information about Direct Consolidation Loans and federal loan
repayment options, visit the
Federal Student Aid website.