How Student Loan Consolidation Works

Reviewed: March 30, 2016
By FinanceWeb

Attending a private university can cost more than $50,000 a year, and even community colleges can cost more than $15,000. For students, getting loans to pay for school is often a necessity. If you borrow $15,00 at 6.8 percent, you will pay $172 a month for 10 years. By the time your loan is paid off, you will pay more than $20,000 for the amount you originally borrowed. Paying off student loans can be daunting. This task is made even more challenging by the fact that you may have different loans, interest rates and payment times. For many students, student loan consolidation is an option for making your debt load easier to handle.

How Loan Consolidation Works

Student loan consolidation is designed to combine multiple loans into a single, larger loan. Basically, one lender agrees to buy up your loan at a certain price. The original loan companies make a fraction of what they would have, but it is a guaranteed way to make immediate money off of the loan. Now, the new loan company owns your loan and receives the payments. The new lender wants to do this because they will earn a profit as long as you pay off your debt.

The Benefits of Consolidating

Before you consolidate your loans, make sure you decide if it is actually necessary. Many students choose to consolidate because it allows them to deal with just one lender and a single monthly payment. Other students choose to consolidate because it restarts the time clock for loans that are in forbearance or deferred. Consolidation can lower the interest rate on certain loans, and it may offer new repayment options. Depending on the lender, you may be able to access extended repayment plans, income-sensitive repayment or other options.

The Drawbacks of Consolidation

While there are advantages to consolidating your loans, this process is not for everyone. If you consolidate, you will lose any grace period that was built into the structure of your loans. Many loans do not require payments until six months after you graduate. If you consolidate too early, you may lose this grace period. There are also some loans that have interest benefits for your taxes, so you may lose these benefits if you consolidate your loans. Likewise, loan consolidation can change your extended repayment options. Most loans can only be consolidated once, so you will be unable to change the loan structure later on.

Becoming Eligible

If you want student loan consolidation, you have to make sure that you are eligible. Every issuer and lender has different rules for consolidating. For instance, Sallie Mae will only consolidate for students with more than $30,000 in loans. As a rule, your best time to consolidate is within the first six months after graduation. You will want to consider your current financial situation before consolidating your loans because the consolidated loans may have a higher payment or longer duration.

Ideally, you should speak with a financial professional before you consolidate your loans. A financial professional can help you to find the best lender for your loans and decide if this choice is right for you. Do your homework in advance, and you can end up with a more manageable debt load.