divine angst

There’s a lot of noise out there right now (see one post) regarding consolidating student loans to lock in lower rates.

And because this involves the federal government and money, it is, of course, totally confusing. So I’m going to throw some info at you right now, gleaned from my years of applying for financial aid and doing everything possible to save a few cents in the process.

First, you can only consolidate federal student loan debt. This means Stafford Loans for most of us. (And Perkins Loans, though there may be drawbacks to consolidating Perkins Loans because they already have such good terms.) There are some other loans that are eligible, too, including PLUS loans from undergrad. (See the full list here.) But all those private loans you took out? Not eligible. You may be able to refinance them through your lender, but that is NOT the same as consolidation.

What is consolidation, then? A primer: You have separate federal loans for each year of school you took out federal loans. You could also have more than one loan in a given year, since subsidized Staffords are disbursed separately from unsubsidized Staffords and Perkins and PLUS loans. Yeesh! And in many cases, all of these loans will have different interest rates. They also will all have separate repayment schedules, based on their dates of disbursement.

Consolidation allows you to combine all of the debt into a single loan, and that single loan will have a single interest rate and a single repayment schedule. The interest rate will be based on the current federal student loan interest rates. (Oh, and not everyone who consolidates right now will end up with the same rate—it does vary depending on when you took out the loan. Yeah, it’s really confusing, but websites like Sallie Mae have some helpful FAQs and some wizards to help you figure out if you are eligible for consolidation and what your new rate will be after consolidation.)

Consolidation also allows you to extend your repayment period—up to 30 years from the date of consolidation. So if you just started repayment and you have 9-1/2 years left, consolidating will give you an additional 30 years, for a total of 30-1/2 years. Whee! However, if you’ve been repaying for five years, consolidation may not be the best option for you, unless you are about to take on some additional financial burdens, like buying a house, having a child, or going back to school. (Of course, you can consolidate anyway and continue to make the same payments. However, you could possibly be putting your money to better use in that scenario. But that’s fodder for a different post [and different blog]. If you don’t know what I am talking about, contact a financial advisor.)

One other thing—I am pretty sure that you have to have at least $10,000 in debt to be eligible to consolidate. (At least, that’s what Sallie Mae told me when I wanted to consolidate undergraduate debt last year.) Look into it.

What about in-school consolidation? You can consolidate while you are still in school and lock in that low, low, rate on your existing loans. You will lose your grace period on those loans, though. Now, while you’re still in school, you won’t have to pay on them—you’ll get “in-school deferrment” as long as you are enrolled at least half-time. But once you graduate, you won’t have that 6 month grace period to get your stuff together and start earning some money. You have to start paying back right away. If you’re at the end of your schooling and you have a lot of debt, it still might be worth it to consolidate anyway, especially depending on how much lower your monthly payments will be if you consolidate. But do be aware of the ramifications.

What if I take out more loans after I consolidate? You can always consolidate federal loans as long as you have at least one eligible loan that isn’t already consolidated. But any time you reconsolidate, you get a new interest rate, based on the base interest rate for that year. So if you consolidate now, get the good rate, and take out another loan for next year and consolidate NEXT summer, you will reconsolidate to the new, HIGHER rate for next year. That would be silly, yes?

Now, if you have already incurred most of your debt and you’ll only be taking out a little for next year, it could definitely be worth it to consolidate now on the lion’s share, and just pay that extra loan separately. If you just started incurring debt, though, crunch the numbers a few times to see whether you’ll come out ahead. And of course, remember that, if you extend repayment, you may end up paying more in interest over the life of the loan than you otherwise might have. Even with a low rate.

There’s a lot of information out there about reconsolidation. Do your research. Basically, if you’re just about to enter repayment or you’ve only been in repayment for a short time, consolidation is almost a no-brainer—do it. But if you’ve been in repayment for a while, it’s probably worth running the numbers and maybe talking to a financial advisor before consolidation. Ditto for in-school consolidation.