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How to Consolidate Loans

About how an approved agency pays off your existing loans and creates a single new loan.

The basics

Consolidation is the process by which an approved agency pays off your existing loans and creates a single new loan. In essence, you refinance your education debts.

After you graduate or are no longer enrolled at least half-time, you may want to consider consolidating your loans to avoid multiple monthly payments. However, consolidation is not always the best option, as you may lose deferment privileges, and federal death and disability benefits, while paying back more in interest over time.

Advantages

Typically there are no prepayment penalties.

Federal consolidation loans do not have fees.

A fixed-interest rate.

A reduced monthly payment with an extended loan term.

Fewer bills to manage various repayment options:

  • Standard repayment—you pay a fixed amount each month until your loan is paid in full.
  • Extended repayment—allows you to extend loan repayment over a period of 10 to 30 years, depending on your loan amount.
  • Graduated repayment—allows you to make smaller payments at first, and larger payments later. This is a good strategy for students who cannot make large payments immediately after graduation. Payments start low and increase every few years.
  • Income contingent repayment—your monthly payment is based on your yearly income, family size, and loan amount. Your payments rise and fall with your income. After 25 years, any remaining balance on the loan is forgiven, however, you may have to pay taxes on the amount forgiven. Payments may never exceed 20 percent of your discretionary income.
  • New Income-Based Repayment is now available—your monthly payment is based on your annual income. You must have a partial financial hardship to enroll.

Disadvantages

You may lose deferment options.

More interest over time if you choose not to prepay your loan.

Possible loss of payback benefits from current lenders (i.e., interest rate reductions for submitting on-time payments).

To consolidate federal student loans

Consolidation is available to most borrowers of federally funded educational loans. A new Special Direct Consolidation Loan has been made available.

To qualify for federal loan consolidation, borrowers must:

  • Be in their grace period OR currently repaying their educational loans
  • Not be more than 90 days delinquent on educational loan payments

You may also want to contact your lender or servicer to discuss other repayment options. If you do not know your lender(s), access your federal loan information through the National Student Loan Data System (NSLDS).

For consolidation options, visit the Federal Direct Consolidation Loan Information Center or call 800-557-7392

To consolidate private alternative student loans

Most lenders do not consolidate private loans together with federal loans. Review the terms and conditions associated with each loan program before you apply. Alternative lenders may require you to be in active repayment before you can apply. You may want to contact your private alternative lender, if not listed, to find out if they offer a consolidation loan.

For more information on private alternative loan consolidation and lender options, please visit FinAid.org

For more information on consolidation, visit:

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