QuickOverview

It is often a good idea for borrowers to combine several student or parent educational loans into a single loan with a single lender. These combined loans are known as Consolidation Loans. Regardless of the alphabet soup you used to get your loans (PLUS, FISL, SLS, Stafford, Perkins, etc.), it is likely that there is a consolidation loan out there for you.

At a high level, the student or parent will select a lender and combine multiple loans into a single loan. Federal law sets a limit on lenders to charge an interest rate that is a weighted average of the interest rates of your existing loans, with a cap of 8.25%. Depending on the borrower's circumstances, there is an opportunity to deviate from the standard ten year and choose a longer term.

Reasons for Consolidation

There are several reasons why you would want to consolidate:

Save on Interest

Federal law sets a maximum interest rate of 8.25% for Federal Consolidation Loans. Therefore, if some of your educational loans have a higher interest rate, you could save money by lowering the interest rate of your educational loans. PLUS loans fall into this category more often than others. In fact, if you are paying more than 8.25%, it may be a good idea to get a consolidation loan even if you only have a single loan to begin with.

Another way to save money on interest is if you find a lender that gives you an interest rebate for things like a direct debit payment plan or a pattern of online payments. These savings will generally be very small ( 0.25% ). Overall, the interest rate will generally be a weighted average of the loans you are consolidating.

Beware that getting a consolidation loan may slightly increase your student rate. Federal law allows lenders to round the interest rate up from the weighted average of your loans to the next eighth of a point. For example, if the weighted average of all your educational loans is 7.2%, the lender will be allowed to set the interest rate for your loan at 7.25%.

Save on the Monthly Payment

When converting to a consolidation loan, you may have the option of extending the repayment term beyond the standard ten years. This will lower your monthly payment for these loans. Keep in mind however, the total interest you will pay over the life of the loan may increase.

Simplicity

If you have several student loan payments to make, it is easier to consolidate and make a single payment to a single lender.

Downside

If you plan to pay off your student loans more quickly than the loans' payment terms, it may be against your interests to consolidate loans. If you make principal payments to the loans with the highest interest rates first, your effective interest rate would be lower than the weighted average interest rate of all the loans.

Next Steps

This article is a quick overview of consolidation loans, but there are many details you need know about. It is a good idea to discuss your specific situation with the financial aid office of the college you attended.

One you feel comfortable that you understand consolidation loans, you should contact a couple of lenders to discuss the steps you need to take to make the switch.