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.