Any student who has made use of a student loan to help finance college will graduate with a minimum of four loans, one for each academic year. This is a conservative amount as a student may have multiple loans each year in the form of various federal and private loans. Assuming a student has used each of the federal Stafford loans annually, plus a private loan, there will be a total of 12 loans outstanding on graduation. Consolidating loans simply means combining them all together to simplify monthly payments into a more manageable repayment system.
The benefits of consolidation loans should be considered. However students should be aware that although it is possible to consolidate federal loans with a private lender it is never advisable to do so as federal loan rights will be lost in the process. It is not possible to consolidate private loans into a federal consolidation loan, thus students with both federal and private loans will need to consider consolidating into two separate loans.
Federal loan consolidation is available through the U.S. Department of Education Direct Consolidation Loan Program. Opting for federal loan consolidation is fee free, with no minimum loan amount imposed. All federal loans can be combined regardless of current status: thus loans in the grace period, in deferment, repayment, and even default can be included, though defaulted loans must have arrangements made to bring them up to date. Currently it is also possible to consolidate in school loans but students who do so lose the right to the six months grace period.
The biggest benefit of consolidation is to obtain a total lower monthly repayment through utilizing a lower interest rate. Federal rates are fixed allowing easy comparison. Monthly payments can also be lowered by extending the original term of the loans, although this option is only recommended for those struggling with monthly repayments as lower payments over a longer term result in much higher interest repayments overall, thus costing more.
Federal loan holders should do the calculations to see if consolidation offers a reduced payment compared to the total payments on multiple loans, by studying the interest rates. This can be simplified by using a consolidation loan calculator. Those who elect to consolidate federal student loans at a later date, rather than upon graduation, may qualify for additional deferment rights if they have already utilized the available deferment options.
Those who have private student loans should also consider the benefits of consolidation, but need to pay particular attention to each lenders terms and conditions. They may consolidate with their current lender if the service is offered, or with a new lender. Once again it is possible to reduce the current monthly outgoing by obtaining a lower interest rate. This is a particularly viable option for those who have established a good credit history whilst in college and will thus qualify for better rates. However attention must be paid to any application fees, early repayment fees on the original loan, and the rights to deferment.
Unless current interest rates offered on consolidated loans are higher than the original ones it makes good sense to consolidate. Simplification of payments by having just one or two automated payments each month allows the graduate to keep much better track of their loan obligations. Unless it is a financial necessity to extend the term of the loan it is far more advisable to avoid doing so and concentrate on paying the loans down in the shortest term.