Student loan consolidation is often an effective means of managing debt for students, parents, and graduates. Combining loans can leave you with one easy payment each month. Depending on the terms of the loan, this can also reduce the monthly payment. However, this can cause an increase in the amount of interest that you pay over the entire life of the loan. To help decrease this cost, it is important to understand the different types of loans and your options.
Government vs. Private
There are two basic categories when considering student loans; government and private. Government loans are offered by government financial institutions. Private student loans are offered by private lenders, most often, a bank. There are two large differences between the two categories rests within the interest rates and benefits that each one offers.
Private loans are not offered the same interest rate discounts as government loans. The interest rates are determined upon economy factors and your credit. Private loans can also require an origination fee. Additionally, private loans do not offer the same benefits as government loans. The only benefits that are offered by private lending institutions are interest rate discounts based upon timely payments and automatic payment.
Government loans offer a much lower interest rate. They also have a number of benefits. The benefits offered will vary, depending on the type of loan. You should also note that any benefits you have with your current lender will be lost after consolidation. Once the consolidation is complete, you will have a new lender with new benefits.
Because government loans offer better benefits and more desirable interest rates, it is highly advisable that you do not combine the two types of loans. Government lenders will not purchase private loans and private lenders cannot offer you the same rates or benefits on your government loans.
Government consolidation
Since your best option is to consolidate government loans separate from your private loans, you will need to know how to comparison shop your government loan consolidation options. Different government loan consolidation plans offer different types of benefits. This is the only difference between government lenders since variables like interest rates and payment terms are regulated by the government.
Stafford Loan Consolidation
Stafford loans are the most widely known member of the government loan family. They are offered in subsidized and unsubsidized versions. These are offered through either a Direct Loan Program of a FFELP lender. Most students have a combination of subsidized and unsubsidized Stafford Loans.
There are certain rules and guidelines that your Stafford Loan lender must adhere to. These are mandated by the government. Interest rates on consolidated Stafford Loans are fixed. The rate is determined by the weighted average of your combined interest rates with a cap of 8.25%.
If you are a graduate within the six month grace period, you may qualify for a lower interest rate before your repayments start. Federal government also states that you cannot apply for consolidation while you are in school. There are no credit checks and no penalties for early payment. However, if any of your loans are in default, you may not be eligible for Stafford Loan consolidation.
Direct Loan Consolidation
Direct Consolidation loans can combine any federally loaned educational funds. These include Stafford Loans, PLUS Loans, and Direct PLUS loans. Similar to the Stafford Loan consolidation option, Direct Loan consolidation is regulated by the government.
Direct Loan consolidation is intended for students and families that have financial disadvantages. They offer flexible repayment options and credit terms. There are no credit checks or fees associated with Direct Loan consolidation. You are not required to have a minimum combined amount in order to qualify for a Direct Loan Consolidation.
Interest rate is fixed through the entire life of the loan and is based upon the weighted average of your government loans, capped out at 8.25%. You may still be able to qualify for a Direct Loan consolidation, even if one or more of your loans are in default. This is usually contingent upon reaching satisfactory repayment terms.
Perkins Loan Consolidation
Perkins Loans do not offer a consolidation option. However, you can consolidate your Perkins loans with any of your other government loans. However, it is advised that you seek the guidance of your Perkins loan counselor before consolidating your Perkins loan.
Perkins Loans offer a large number of benefits to their borrowers. Perks like cancellation benefits if you become a public school teacher will be lost. You will also lose your nine month grace period, three months longer than Stafford Loans. These benefits are available to you as incentive to pursue teaching as a career.
Carefully considering your credit future, career future, and current situation is vital to selecting the right consolidation plan. In many cases, you can find other options outside of consolidation. This may provide you a more effective means of managing your educational debt.