Student Loan Consolidation: What You Need to Know

Student Loan Consolidation: What You Need to Know

Stephen Borkowski

The pride you feel after earning your college degree can also come with anxiety. You know that soon you’ll have to pay back all the money you borrowed. Many loans from different lenders at different interest rates at different times just complicate matters.

Loan consolidation can be a good way to simplify and manage the repayment process.

What is Consolidation?

When you consolidate your student loans, any of the loans you select, are rolled into one big loan, issued from one source. Instead of dealing with multiple loans, you’ve got one loan equal to all the smaller loans.

The interest rate on this new loan is the weighted average of all the consolidated loans rounded up to the nearest 1/8th of a percent and capped at 8.25 percent. Use FinAid's Loan Consolidation Calculator to figure out what impact consolidation will have on your loans.

Why Consolidate?

Lock your interest rate. As of July 1, 2006, all new Stafford loans have a fixed interest rate of 6.8 percent for the life of the loan. But the interest rate on Stafford loans that were borrowed before July 1 will still change from year to year. Students with outstanding loans can avoid interest rate fluctuations by consolidating. The interest rate on a consolidated loan is fixed.

Simplify. You’ll deal with one loan, one lender and have one payment to worry about.

Lower monthly payments. Consolidated loans have four different repayment plan options that give you the opportunity to reduce your monthly payments.

  1. Standard Repayment: You’ll make fixed monthly payments for up to 10 years.
  2. Extended Repayment: You’ll make fixed monthly payments for 12 to 30 years depending on your loan balance.
  3. Graduated Repayment: You’ll make payments for 12 to 30 years with the amount of your payments increasing every two years.
  4. Income Contingent Repayment: The amount you pay will be calculated based on your annual adjusted gross income.


Increase to the overall cost. It’s nice to spend less of your monthly income on student loan payments, but it’s important to remember that by extending the term of the loan you’ll pay more in interest.

For example, consider a $10,000 loan with a 7 percent interest rate. The borrower would have to pay $116.11 per month to pay it off in 10 years. Extending the term to 15 years reduces the borrower’s monthly payment to $89.88. However, over the life of the loan those 5 years will cost the borrower an additional $2,246 in interest.

Use this loan repayment calculator to figure out the details for your loans.

No Grace Period. Many student loans feature a grace period after graduation, during which no payments are required.

Depending on your status and type of loans, you could lose this grace period when you consolidate. Students in Direct Lending who consolidate with Federal Direct Consolidation keep their grace period. But students with FFEL loans (like Stafford loans) would lose theirs.

Research the impact consolidation will have on your grace period.

One time only. Once a loan is consolidated your interest rate is fixed. So, in the event the interest rates drop (not likely in the near future) you won’t be able to relock at the lower rate.

If you take on additional student loans after consolidating, you can consolidate again but your interest rate will be adjusted based on the rates at that time.

How to Consolidate

First, take inventory of your current loans. Make sure you know the type, amount, holder and status of each loan. Most federal student loans (Stafford, PLUS, Perkins, etc.) are eligible for consolidation.

Next, factor student loan payments into your monthly budget and establish how much you can afford to pay each month. This will help you decide how long to extend the term. Remember, the longer the term, the higher the overall cost of the loan.

Finally, contact your lender to begin the application process. If you have loans with multiple lenders, any of them will be able to consolidate your loans. Find out if one of your lenders offers additional discounts for things like making payments electronically.

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