Unfortunately, the concept of repaying your student loans doesn’t become a reality until you meet with your financial aid counselor prior to graduation. With 16 different federal loan servicers and various rules for each, student loan repayment options are confusing. While you cannot refinance student loans, as you would a mortgage, you can consolidate multiple federal student loans to make your debt more manageable.
Let’s take a look at federal loan consolidation: To be eligible, you must have at least one federal student loan in grace, repayment or deferment status. If your loan is in default, you must make satisfactory repayment arrangements with the current loan holder(s) before you consolidate. Borrowers can combine two or more of their federal student loans into one loan. The interest rate is a weighted average of the interest rates on the loans being consolidated, rounded up to the nearest eighth of a percent, with a maximum interest rate of 8.25 percent. However, you can receive a discount of 0.25 percent on your interest rate if you have the monthly loan payments automatically deducted from your checking account. The interest rate on a federal consolidation loan is fixed for the life of the loan.
Borrowers must have at least one or more federal loans, with a total balance of at least $7,500. There are more than 20 federal loans eligible for consolidation. Perkins loans made through schools, generally, must be repaid to the schools. It is possible, however, to consolidate your Perkins loans if you have at least one federal direct loan in the request. Since private student loans are not made or backed by the federal government, they are ineligible for federal consolidation.
Once you consolidate your loans, you will owe the U.S. Department of Education a single monthly payment. Additionally, it costs nothing to consolidate; you may receive renewed deferment benefits; there are no prepayment penalties; and consolidated loans offer multiple repayment options — which I’ll cover in another article.
With loan consolidation, you can lower your monthly payments by extending your repayment period up to 30 years. If you still have variable interest rate loans, you can lock in a fixed interest rate through consolidation. Before you sign on the dotted line for consolidation, it is important to understand that by increasing the length of your repayment period, you’ll also add several thousands of dollars in interest.
While extended repayment periods make payments more manageable, it is recommended that you compare your current monthly payments to the amount of the monthly payment should be if you consolidated your loans.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.