What is Student Loan Consolidation?

Though the loan consolidation process and its terminology can be

complex and confusing, the basic concept is easy to understand: You take all of your outstanding federal student loans (even if it’s just one loan) and bundle them into one new student loan with one monthly payment. The new rate is fixed—meaning it won’t change—and the length of the loan can be extended all the way up to 30 years, which can lower the amount of your monthly payments. It’s a kind of refinancing of your federal student loans.

Student loan consolidation has grown significantly during the last

several years. Students and their families have had to take on more

financial burden due to a combination of steep increases in tuition

(annual costs rose 35 percent during the last five years) as well as

a decline in the amount of federal and state financial aid, including

grants, to students. Put another way, this new era is being called “debt

for diploma.” In turn, loan consolidation has become such a viable and

necessary option that some 2.5 million students consolidated their

loans in 2005. The U.S. Department of Education predicts that nearly as

many students will do the same in 2006.

What Are the Pros and Cons of Federal Student Loan Consolidation?

There are many good reasons to consolidate your student loans. However,

there are other factors that borrowers will need to consider before making

their decision.

First, on the positive side. You’ll simplify your life with one monthly payment

that will come from one lender (and one point of contact if you have

any questions). Because you are extending your loan’s term (or how many

years it’s going to take to pay back your consolidated loans), your monthly

payment will be lower. That’s where the term “payment relief” comes from.

Loan terms range anywhere from 10 years all the way up to 30 years. And

the interest rate on a federal consolidation loan is fixed—which is unlike

variable interest rate loans that can change. Your consolidated loan’s interest

rate will be equal to the average of all the student loans you want to consolidate,

which is then rounded up to the nearest 1/8 percent. The maximum

rate your loan can be is 8.25 percent.