Managing Student Loans

There are three benefits to consolidating your loan: locking in a lower, fixed interest rate, reducing your monthly payment, and making only one payment a month.

If you recently graduated from college, or plan to in the near future, and financed your education with student loans, you soon will be inundated with all manner of official looking junk mail. You’ll receive first, second, third, fourth and “final” notices about your consolidation rights and opportunities. Despite the threats of “final”, these notices keep pouring in. Student loans are big business, but consolidation can truly save you money. You need to understand your options before choosing whether to consolidate your student loan.

Federal student loans, private student loans, and certain special school loans (e.g. medical, supplemental) can all be consolidated. Federal consolidation is the most common as this is the most common source of student financial aid. Federal aid comes in a variety of flavors, the most common four being: Stafford, Parent Plus, Graduate Plus, Perkins.

Each student who accepts federal financial aid usually gets a package with aid coming from more than one of the four sources listed above. Each loan will have it’s own variable rate and at the beginning of each loan period (e.g. quarter or semester) the interest rate can change. Thus, you will be repaying several different loans at many different interest rates. To make maters worse, these rates are typically higher than what a person can negotiate freely. Obviously, finding a way to consolidate all these loans into a single loan with a single interest rate and single payment makes sense.

Third-party lenders are attracted to federal student loan consolidation because it his hard, if not impossible, for the student to discharge the debt (e.g. in bankruptcy). In addition, the loans are typically for significant amounts with payoff periods in the fifteen to thirty year ranges. Thus, student loans are a safe investment for third-party lenders. They can step in and create a win-win situation by offering you a lower rate and securing a safe loan with lots of interest payments if the loan goes to term.

There are a lot of companies out there that want your student loan consolidation business. The best and most used is probably Sallie Mae, which was started as a government supported program. Now entirely private, Sallie Mae is the largest student loan financier and is, in my opinion, the safest bet. However, there are others out there. Federal law requires truth in lending so, as long as you read the fine print, you should be able to compare apples to apples among the various offers and choose the plan that best benefits you.