Consolidation of Loans

There are only a few Americans who are able to pay for their postsecondary education without needing to resort to loans in order to pay for everything. Because of the exorbitant accumulated cost of going to school, many decide to take advantage of several different loans in order to pay for everything.

Generally, it is highly recommended that students and their parents take full advantage of the federal financial aid available such as the Stafford Loan or the Perkins Loan or the PLUS for the parents. However, because of the limited amounts allotted to each of these loans and their restrictive terms, many also require to go for Alternative or Private Student Loans in order to tie up the financial loose ends.

A loan consolidation is when you avail of a larger loan to pay off several smaller loans, similar to when your parents are refinancing their mortgage. Of course, you can also consolidate a single loan as long as that loan is not a consolidation loan in itself. There are consolidation loans available for your federal student loans and there are private consolidation loans available for your private student loans. Since this will be a new loan, a new timeline is created for repayment and the terms of repayment will also change.

Many parents and students decide to consolidate loans for certain reasons like extending the terms of repayment, convenience or lowering the interest rates of the loans. The interest rates of the consolidated loan is calculated based on the weighted average of the loans. It can also be capped at 8.25% (a 0.25% reduction applicable for PLUS loans) but generally, when you consolidate your loan, it does not automatically mean that the amount you'll be paying will be greatly reduced. The amount you'll be spending for paying off your loans will be roughly the same whether you consolidate your loans or not.

One good advantage with loan consolidation is that you can easily organize your loans under one parent loan without any consolidation fees. All the charges will be taken from your disbursement, and no fee should be paid up front. Should anyone tell you that you have to pay a certain fee in order to consolidate your loan, that guy is most probably a conman.

However, there are strict rules of who can consolidate their loans. For example, student loans and parent loans (which were used on behalf of their child's education) cannot be consolidated even if they are used to finance the same thing (your college education). Only debts from the one borrower will be consolidated. This also means that married students cannot consolidate loans because it will also become a big issue when the couple divorces.

Students can consolidate loans within the two month grace period after graduation or when the loan has entered the repayment phase. In short, they cannot consolidate loans while still studying. However, the PLUS loans of the parents may be consolidated any time according to their discretion.

It is also fortunate that your loans can be consolidated with a lender but before you begin consolidating your loans, it would be best to refer to a Loan Consolidation Calculator to see if you are making the right decision. There are also some lenders who offer loan discounts to encourage people to consolidate their loans. Some lenders also demand a minimum balance as a condition to awarding you a consolidation loan.

The option of consolidating your loan can come with several tradeoffs. It would be most prudent to assess all possible options and alternatives before making any decisions.