Consolidating your student loans can save you a good amount of money and can reduce your monthly payment up to 53%. A student loan consolidation will however lengthen the term over which the loan is to be repaid significantly – sometimes it can even double.
Because no one knows what will happen in the future, it is usually safer to consolidate now rather than later. Should your remuneration increase after landing a better job or getting a promotion and you feel you can afford to pay more, you can do so without being penalized – even if you pay up the balance of the loan earlier than scheduled. But if you don’t consolidate now and your salary should drop for whatever reason, you could find yourself struggling to make the payments.
The decision to consolidate your student loans should, however, not be taken lightly. Not only is it a long term financial plan, it is also not reversible even if you were to have any new loans added into the consolidation should you go back to school again - the reason being that the rate is determined through a weighted average since each loan has a different rate.
Similarly, I wouldn't recommend consolidating your federal and private student loans together as doing so would not allow you to take advantage of the benefits associated with federal loans. Instead the consolidated loan would be set to a variable rate, which is adjusted quarterly based on the LIBOR or PRIME rate indexes, which can sometimes increase depending on market conditions.
For those who took out their loans prior to July 1, 2006, in particular Stafford loans, you would have benefited from the recent drop in variable student loan rates and may benefit again since the rates are reviewed on July 1 of every year. So if you have recently graduated, it may be wise to wait for a few months until the next review before consolidating your student loans as this can save you even more money.
For parents borrowing PLUS loans for each school year, it is possible to consolidate the loans – simply fill out a Consolidation Promissory note with the lender you choose. Your loan payments will then be paid back to this lender, instead of your initial lenders for the loans.
Parents with several children in school will be pleased to know that they can combine their PLUS loans for all their children into one. However, in a case where the mother took out the loan with her social security number, her PLUS loans cannot be combined with any PLUS loans applied for by the dad who would have his own social security number. It is, therefore, advisable to apply for the PLUS loans in one name to avoid such a predicament in the future.
It’s not just federal student loans that you should be looking at consolidating – there's an equal advantage if you consolidate your private loans. This can be done with most lenders as long as the loans you wish to consolidate are nationally-marketed and it dosent’t matter even if they are from different lenders.
Besides reducing your payments, there are other benefits associated with private student loan consolidation, including co-signer release after 48 on-time payments. Also interest payments on consolidated student loans may be tax deductible according to the Taxpayer Relief Act of 1997 – as with all tax matters, it is advised you consult your tax advisor.
