Consolidating Your College Loans

Yara Zakharia

Nearly half of college graduates finance their education with student loans, and the average graduate is encumbered with at least $19,000 in student loan debt according to the National Center for Education Statistics. Moreover, increases in college tuition costs are two times higher than the inflation rate. The good news is that individuals may avail themselves of college loan debt consolidation to reduce their debt burden. A debt consolidation loan enables student borrowers to have a surplus of cash at the end of the month and reap long-term savings. Debt consolidation for college loans involves the merging of a graduate's loans into a single loan and the reduction of monthly payments by extending the term of the loan. The first step that student loan debtors must take is to gather the following information: 1) the amount of their monthly payments, 2) the type of loans they have taken out, 3) the lender's name, 4) the repayment period, and 5) the fees that are included.

What is Federal Student Loan Consolidation?

Debt consolidation of federal student loans consists of combining a borrower's existing federal education loans into one new loan. Debtors may consolidate federal loans that are of different types and that are held by more than one creditor. Examples of federal loans that qualify for federal loan consolidation include Stafford loans, PLUS loans, HEAL loans, Perkins loans, and Direct loans. The rate of interest on a federal consolidation loan is calculated on the basis of the weighted average of the federal loans' interest rates and rounded to the nearest 1/8th of a percent.

Eligibility Requirements for Federal Student Loan Consolidation

To qualify for college debt consolidation of federal student loans, graduates must 1) have at minimum $20,000 in federal loans, 2) not be enrolled more than half-time, and 3) not be in default on any of their federal loans. Borrowers are not required to have a co-signer, submit to a credit check, post collateral, show proof of employment, or pay any application fees, prepayment penalties, or origination fees. The application process is easy and quick, and it may be completed online or via telephone with the assistance of a consolidation specialist.

Advantages of Federal Student Loan Consolidation

Federal student loan consolidation offers borrowers key benefits, including:

1. Fixed low monthly payments (a reduction by as much as 50%);
   
2. Enhanced credit rating;
   
3. A lower rate of interest that is locked-in (as low as 6.75%);
   
4. Simplified finances with only one, easy-to-manage monthly payment;
   
5. A .6% interest rate reduction for borrowers who consolidate during the grace period (typically within 6 months after graduation);
   
6. An extended repayment term (up to 30 years);
   
7. Opportunity to apply for forbearance (short-term reduction or postponement of payments due to financial hardship) or deferment (temporary suspension of payments for qualifying events such as unemployment); and
   
8. Income tax deduction of interest paid.
   
   
   

Repayment Options For Loan Consolidation

Student loan borrowers who consolidate debt may choose from multiple repayment options such as the following:

• Graduated payments
  
• Income-sensitive payments
  
• Equal payments
  
• Extended equal payments
  
  
  

What is Private Student Loan Consolidation?

This involves the merging of a graduate's private student loans, including those covering academic expenses such as housing, books, and tuition into a single loan. Private loan consolidation requires a payment of origination fees which range from 1 to 5%, depending on the co-signers credit or the borrower's credit.

Eligibility Requirements for Private Loan Consolidation

To qualify for private educational loan consolidation, an applicant must satisfy the following criteria:

• Be a permanent resident, U.S. citizen or an eligible non-U.S. citizen;
  
• Have a good credit score;
  
• Be in the repayment period;
  
• Have a least $7,500 in private education loans; and
  
• Be at least 21 years of age.
  
  
  

Benefits of Private Student Loan Consolidation

Debt consolidation of private loans enables borrowers to reap the following benefits:

• One convenient monthly payment;
  
• Substantially lower monthly payments;
  
• Lower variable interest rates;
  
• A repayment term of up to 25 years for undergraduate student borrowers and up to 30 years for graduate student borrowers;
• No prepayment penalties;
  
• Income tax deduction of up to $2,500 in educational loan interest;
  
• Rate reductions for borrowers with excellent credit; and
  
• Opportunity to have a co-signer with good credit apply for them.