School Loan Consolidation: A Briefing

In 1986, the United States put into place the Federal Consolidation Loan Program that places focus on school loan consolidation. The purpose of this program was originally to reduce the risk of default for certain students by increasing the loan terms and decreasing monthly payments. School loan consolidation works to combine one or more student loans. When the loans are combined, the monthly payments are reduced. Generally, this means switching the variable interest rate to a fixed rate.

Often, students choosing a school loan consolidation believe that the lower monthly payment is a great catch. However, the lower monthly payment is a result of extending the loan repayment period from 5-10 years to 15-30 years. The original loan is paid off and the student resumes paying on the new, consolidated loan.

A prime reason to choose a school loan consolidation is to lock in the current interest rate. When this is done, the borrower will not be subject to any changes in interest astime goes on. Additionally, while the loan term is increased, the lower monthly payment is decreased, which may allow for better budgeting.

There are very few drawbacks to a school loan consolidation. There are never any fees to consolidate nor are there prepayment penalties. If you can afford it, you could pay the same monthly payment from before consolidation and pay the loan off in the original term but with the security of knowing that you have extra time. The main drawback would be to have locked your consolidation into a high interest rate. Always shop around.

Should married students consider school loan consolidation? Generally, married students can consolidate their loans together in the agreement that they repay no matter what the total loan is and regardless of any change in their marital status (death or divorce).

There are two different programs available for school loan consolidation. The first is the William D. Ford Direct Student Loan Program (Direct), which is offered by the United States Department of Education and the second is the Federal Family Education Loan Program (FFELP), which is offered through various private lenders.

The two school loan consolidation programs are essentially the same. The main difference between the two is that the direct consolidation may be done at anytime, even while the student is still in school. The FFELP must be completed after the student graduates.

When would a student not consider school loan consolidation? If a student were near the end of the loan term, perhaps considering deferment would be the optimal choice, especially if finances are in distress. Remember, consolidation does lower the monthly payment but increases the overall interest by increasing the loan repayment period.

Furthermore, school loan consolidation may not be the best choice for all the loans a student has. Many students opt to consolidate unsubsidized loans only or just choose to leave any high interest loans with low balances out of the consolidation.

If you have student loans, it is in your best interest to always conduct further research on how school loan consolidation would work for you.