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Student Loan Consolidation

By: David Benton
Published: October 2006

It is fairly common for many college graduates to be saddled with $50,000 in debt, or even $100,000, once they’ve graduated from college. When graduates are burdened by this much debt, it may be safe to assume that the borrowed money came from multiple sources, such as a mixture of federal loans and private loans, all of which usually have different balances, as well as different interest rates.

Here’s a scenario of what a recent college graduate’s financial situation might look like after graduation:

They probably have both subsidized and unsubsidized federal student loans, which may have the same interest rate, depending on whether or not they come from different sources or were taken out at different times. While he/she was in school the federal government was paying the accruing interest on the subsidized loans, while the interest was accruing on the unsubsidized loan, and more than likely said student didn’t opt to make the interest payments while attending school.

In addition, nobody was paying the interest at all on his/her private loans, which also have a significantly higher interest rate than federal loans, i.e. the interest rate on the federal loans may have been around 4%, but the rate on the private loans were probably around 5% or 6%, depending on their credit score.

This type of debt situation can be extremely confusing to keep track of and can make keeping your finances in order nearly impossible. Just imagine having to make a monthly payment on four or five different student loans each month!

To help recent graduates make an easier transition into the workforce, there is the option of loan consolidation - an option which anyone with more than one student loan should take advantage of.

Student loan consolidations work by giving you one loan which pays off all of your multiple loans so that you only have to make one payment per month. The interest rate on a consolidation loan is the average of all the interest rates on your multiple loans rounded up to the nearest 1/8 of a percent. This rate is fixed for the life of the loan and cannot exceed 8.25%.

However, here is a word of advice for those individuals who have both multiple private and federal loans: Don’t consolidate them together.

You can’t consolidate your private loans with a federal lender. Federal lenders won’t allow this. However, you can consolidate you federal loans with a private lender, but don’t. The upside to a federal lender is the lower interest rate, which you will not get if you consolidate your federal loans privately. Your best option is to consolidate your federal and private loans separately, so that you have two payments. It may not be the one payment you’re looking for, but two monthly payments is still better than four or five, and you’ll still save money.

It should also be noted that while federal loan consolidation is just as easy to get as the initial loans were, private loan consolidation will take into account your credit score and history, which will determine your interest rate, or whether or not you even qualify for consolidation.

Student loan consolidations can be a life saver to the recent graduate who is faced with the challenge of finding their niche in the workforce. This can be a hard enough task without having to worry about paying multiple student loans each month. So don’t put off doing it any longer. Most student lending institutions offer loan consolidations, so take advantage of it while you can.

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