According to the Project on Student Debt, the average debt for graduating college students is $24,000 as of 2010. This marks a rise in the average debt compared to previous years. In 1996, the average was $13,200. The Institute for College Access and Success found that student debt is growing at an average of 6% every year. A survey of 73 colleges found that 90% of their students left college in debt for their education. And that brings us to student loan consolidation.
If only it was as easy to pay back the debt as it was to take it out. Depending on the type of loan, students are expected to start paying off their debt very soon after graduating. In some cases, consolidating your student loans can reduce your interest rate and the number of loans you have to manage. The question is, how do you consolidate student loans.
When borrowing for school, students take out either federal or private student loans. Federal Stafford loans are the most common for eligible applicants because they come with the lowest interest rates compared to traditional loans. Private loans are a last option due to higher rates and less forgiving terms. Students often times get loans from multiple sources in order to meet their tuition needs and school expenses. Upon graduation or soon thereafter, many students attempt to consolidate their student loans. So let’s take a look at consolidating both federal and private loans.
Consolidation loans combine several student or parent loans into one big loan from a single lender, which is then used to pay off the balances on the other loans. The theory is that either by stretching out repayment of the loans or refinancing them at lower interest rates (or both), the borrower can reduce monthly payments. Unfortunately, this is not always the case.
It is important to note that Federal student loans cannot be consolidated with private loans. Also, most lenders require a minimum balance before they will consolidate your loans. For example, many lenders will only offer consolidation loans for borrowers with loan balances of at least $7,500. The Federal Direct Consolidation Loan program, however, has no minimum balance for consolidation loans. The interest rate on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25%.
Beginning in July of 2006, all federal student loans began carrying fixed interest rates. Therefore, by consolidating them, borrowers could often lock in a rate that was lower than what they were paying on each loan separately. According to Mark Kantrowitz, publisher of FinAid, a website that tracks the college financial aid industry, now, “there is no financial benefit to consolidating federal loans, other than having a single monthly payment and access to alternative repayment plans.” Only if you are having trouble or foresee having trouble making the payments will consolidation of federal student loans help you.
It is important to remember that although a new payment plan may help to reduce monthly payments, it will most likely add on thousands of dollars in interest costs as the terms of the loan will be extended. Finally, those with federal student loans may opt for a new income-based repayment plan in which the monthly payments are capped at a certain percentage of the borrower’s income. This may be a good choice for those going into professions where the starting salary is not very high.
Private student loans, on the other hand, are a different story. Private loans, unlike federal loans, carry variable interest rates. Interest rates on private student loans are based on one’s credit score. Therefore, you may be able to get a lower interest rate through a private consolidation loan if your credit score has improved significantly since you first obtained the loan.
For instance, if it has been several years since you gradated and you have established a strong credit history, your credit score may have improved by 50 to 100 points. Accordingly, you may be able to get a lower interest rate by consolidating your debt with another lender. The following education lenders, as listed on the FinAid web site, will consolidate private education loans.
- $7,500 minimum / $100,000 maximum for undergraduate degree recipients / $150,000 for graduate degree recipients
- Up to 15-year term.
- Variable rate loan.
- Interest ranges from Prime + 1.50% to Prime + 4.00% / Origination fee is 1.00%.
- Rates based on credit and ACH payments
- Cosigner release option after 12 months of on-time principal and interest payments, provided that credit criteria are satisfied
- Graduated and level repayment options available.
Chase Private Consolidation Loan
- Chase has temporarily suspended this private consolidation loan program
- $7,500 minimum / $150,000 cumulative borrowing limit
- No fees
- 30 year repayment term
- Interest rates of one-month LIBOR + 6.0% to one-month LIBOR + 11%. 0.50% interest rate reduction with a creditworthy cosigner
- Cosigner release option after 36 months of on-time payments, provided that credit criteria are satisfied.
NextStudent Private Consolidation Loan
- NextStudent has temporarily suspended this private consolidation loan program
- $7,500 minimum / $300,000 maximum
- Up to 30-year term
- No prepayment penalties
- Variable rate loan
- Interest rates of 3-month LIBOR + 1.00% to 3-month LIBOR + 1.75% during the first year and 3-month LIBOR + 5.00% to 3-month LIBOR + 5.75% after the first year
- Interest rates vary quarterly
- Origination fees of 0% to 5%
- No prepayment penalties.
- $10,000 minimum /$300,000 maximum
- 20-year term for loans less than $40,000 / Up to 30-year loan term for higher amounts
- Variable rate loan
- Interest rates of 3-month LIBOR + 5.00% to 3-month LIBOR + 8.5%
- Origination fees of 1% to 5%
- No prepayment penalties
- Cosigner release after 48 on-time payments, contingent upon primary borrower credit.
- $5,000 minimum / $40,000 to $100,000 maximum, depending on credit
- Aggregate loan limit of $100,000 (including other education debt)
- Up to 15-year term
- Variable rate loan
- Interest ranges from Prime + 1.0% to Prime + 5.75%
- Variable rate has a floor rate of 3.25%
- No origination fees
- Up to 0.50% interest rate reduction for auto-debit
- 0.5% interest rate reduction after making 48 initial on-time monthly payments.
The interest rates are dictated by the lender, not the government. It is very important to do your research to determine if there are additional fees associated with the origination of these loans.
If your school participates in Direct Lending, you should visit the US Department of Education’s Federal Direct Consolidation Loan website. There is no doubt that student loan consolidation may help; however, first ensure that you understand the type of loan you have and the consolidation options available. Then, see if consolidating your student loans makes sense.