Student Loan Consolidation

Student loan consolidation can be a complex task since most students borrow from the federal government to finance their education. Federal student loan consolidation is subject to various rules and regulations. Many students drowning in debt are not aware of these regulations and make costly mistakes.

This student loan consolidation report will help you clear up the confusion, answer some questions, offer many money saving tips and provide resources to help you make a smart student loan consolidation plan.

Student loan consolidation is allowed for most federal student loans, including all Stafford, Perkins, Graduate and Direct loans. There are no upfront fees required for federal student loan consolidation, so be wary of consolidation scams that require you to pay some kind of advance fee.

Your student loan consolidation can be made through any lender you choose. This allows you the opportunity to find a lender with the lowest interest rates, discounts and convenient repayment options. Many student loan consolidation lenders will require a minimum balance of at least $5,000 before they will approve your student loan consolidation request. You can consolidate through the Federal Direct Consolidation Loan Program if you have a smaller amount owing that you wish to consolidate.

You can only apply for student loan consolidation after the grace period begins, which is after graduation. Students are no longer permitted to consolidate their student loans while still attending school. Parents holding student loans for their children may consolidate at any time.

Interest rates on student loan consolidation plans are based on an average of the interest rates on the loans being consolidated. They are rounded up to the nearest eighth of a percent and capped at 8.25%. Your student loan consolidation interest rates will never be higher than 8.25%. For instance, if a borrower has a Perkins loan at 5% and a Stafford Loan at 6.8% the average is 6.2%. The average is rounded up to the nearest eighth of a percent, to 6.25%.

NOTE: If you have a Stafford PLUS loan, you are at a real advantage when consolidating. There is a PLUS Loan Interest Rate Loophole that the federal government overlooked when passing the latest revision to this law. It allows you to receive a student loan consolidation loan that is capped at 8.25%, when a regular Stafford PLUS loan is currently capped at 8.5%. So, just by consolidating your student loan, you will receive an interest rate drop of .25%.

You are allowed to consolidate any type of federal student loan, but restrictions apply to consolidating a consolidation loan. You are only allowed to reconsolidate once, if you need to reconsolidate, you must include a loan that was not previously consolidatated.

Generally speaking, you should consolidate your loans once, toward the end of the grace period or after the loans enter repayment, and then be locked into that lender for the lifetime of the loan. If you want to preserve your ability to use consolidation in the future to switch lenders, you should exclude one of your loans from the original student loan consolidation.

One major advantage to Student Loan Consolidation is the opportunity to choose a repayment plan that fits your budget. Student loan consolidation services provide 5 different plans to accommodate your financial situation. Besides the standard ten-year repayment plan, they also include the extended repayment, graduated repayment, income contingent repayment and income sensitive repayment plans. If you do not specify the repayment terms, you will receive standard ten-year repayment.

Student Loan Consolidation reduce the size of the monthly payment by extending the term of the loan beyond the 10-year repayment plan that is standard with federal loans. Depending on the amount, the term of the loan can be extended from 12 to 30 years. The reduced monthly payment may make the loan easier to repay for some borrowers. However, by extending the term of a loan the total amount of interest paid over the lifetime of the loan is increased. Here is a detailed description of each type of repayment plan offered for federal student loan consolidation:

Standard Student Loan Consolidation Repayment: Under this plan you will pay a fixed monthly amount for a loan term of up to 10 years. Depending on the amount of the loan, the loan term may be shorter than 10 years. There is a $50 minimum monthly payment.

Extended Student Loan Consolidation Repayment: This plan is like standard repayment, but allows a loan term of 12 to 30 years, depending on the total amount borrowed. Stretching out the payments over a longer term reduces the size of each payment, but increases the total amount repaid over the lifetime of the loan.

Graduated Student Loan Consolidation Repayment. Unlike the standard and extended repayment plans, this plan starts off with lower payments, which gradually increase every two years. The loan term is 12 to 30 years, depending on the total amount borrowed. The monthly payment can be no less than 50% and no more than 150% of the monthly payment under the standard repayment plan. The monthly payment must be at least the interest that accrues, and must also be at least $25.

Income Contingent Student Loan Consolidation Repayment: Payments under the income contingent repayment plan are based on the borrower's income and the total amount of debt. Monthly payments are adjusted each year as the borrower's income changes. The loan term is up to 25 years. At the end of 25 years, any remaining balance on the loan will be discharged. The write-off of the remaining balance at the end of 25 years is taxable under current law. There is a $5 minimum monthly payment. Income Contingent Repayment is available only for Direct Loan borrowers.

As an alternative to income contingent repayment, FFELP lenders offer borrowers Income Sensitive Student Loan Consolidation Repayment, which pegs the monthly payments to a percentage of gross monthly income. The loan term is 10 years. All five plans are available for student loans, but only the first three plans are available for parent loans.

Now that you are aware of all of your options and know how much money you will save consolidating your student loans, it time to find a lender. Finding a trustworthy, affordable student loan consolidation lender can be a major undertaking, however I have provided a few recommendations in the links to the right for you to consider. You can also take a look at this list www.finaid.org/loans/studentloans.phtml of student loan consolidation lenders provided by finaid.org.