How It Works
The advantage is often in lowering monthly payment by extension of the term beyond the standard 10-year repayment plan for federal student loans. Reduction makes it easier to repay. The downside to extending term is the increase in total interest amount.
Sometimes it is possible to decrease monthly payment without extending the term beyond ten years, as when repayment of the student loans is less than 10 years due to minimum payment requirements. Essentially the shorter student loans term is extended to 10 years. Unless the same monthly payment is continued the total interest amount will increase.
The interest rate of consolidation student loans is the weighted average of the interest rates on the student loans being consolidated, averaged to the nearest 1/8 of a percent at a maximum of 8.25%.
Consolidating student loans before starting repayment is done with the lower in-school interest rate. So while rounding up the weighted average may cost up to 0.13%, consolidating before starting repayment saves up to a substantial 0.6% net savings. The in-school interest rate is 1.7% with the 91-day Treasury Bill rate from the last May auction. During repayment, the interest rate is the 91-day T Bill rate plus 2.3%. Federal Register and the US Department of Education have confirmed the loophole.
Among the main benefits of consolidation student loans are:
--A single payment to replace multiple payments of student loans.
--Accessibility to alternatives including extended repayment, graduated repayment and income contingent repayment. The extended repayment plan term is based on the balance which is higher on consolidation student loans.
--Locking in the interest rate including for the lower in-school interest rate during the grace period.
There are disadvantages as well:
--Consolidating during the grace payment requires immediate repayments and loss of the remaining grace period, including benefits of subsidized student loans.
--Loss of certain student loans forgiveness provisions on the Perkins student loans.
--Extension of repayment term can increase the total interest in the lifetime of the student loans.
As per the current law consolidation student loans can only be done once. When interest rates fall, having already consolidated makes you ineligible to benefit from the situation. Lenders offering benefits for electronic funds transfer and timely payments are likely to offer less attractive benefits for consolidation student loans.
Married couples have the option of joint consolidation of student loans. A longer repayment term and lower monthly payments are beneficial but problems arise in the event of a divorce. Joint consolidation of student loans makes each of the spouses take full responsibility for repayment. Splitting up the debt during divorce proceedings is not possible so both are held responsible. If one spouse fails to pay, the other one is responsible. Student loans are also not eligible for in-school deferment any longer. Only in the event of death or permanent disability will the debt be dismissed.
Graduate students may consolidate student loans when applying for house mortgage. No savings on fixed rate student loans will result from consolidation of fixed rate student loans. Not that there is any reduction in the underlying rate in consolidating but a slight increase is possible owing to the rounding up to the nearest 1/8th of a point. Instead if the weighted average of interest rates on other student loans would result in the interest rate being rounded up nearly 1/8th of a point, inclusion of fixed rate student loans may distort some of the roundup and result in indirect savings. Similarly with the weighted average just below the 1/8th of a point boundary, inclusion of fixed rate student loans taking it over the 1/8th of a point boundary to increase the interest rate by up to 1/8th of a point beyond.
More information about student loans consolidation can be provided by your lender. FinAid lists education lenders offering federal and private student loans including consolidation student loans.
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