Federal Student Loan Consolidation

This entry was last updated 6-25-2008

I grew up thinking that I was bad at math, but really I just hadn't ever gotten to the fun part yet (well, the part that saves or makes me money and that is fun). In college I discovered that I love graphs, spreadsheets, and researching financial things. I spent a lot of time researching federal student loan consolidation after I graduated (in 2006) and am happy to share what I learned.

Things to consider when consolidating federal student loans...

·Federal rates won’t change until July of each year. Rates might go lower. Rates will probably be announced in June, leaving you a few weeks to make a decision. * See important note below

·Your consolidated rate will be a weighted average of all federal loans you chose to consolidate. That means with today's rates you can't get the 2.5% rates that people who consolidated around 2002 did. Rates just aren't that low anymore.

·There is hope for your rate, though. Every lender will offer you two interest rate breaks and comparing these breaks is how shopping around pays off! When comparing lenders look for:

1. The greatest % drop with auto-payment. This is an immediate benefit.
   (My lender offered .5% while most offered .025%)
   
2. The shortest amount of time before they drop you 1% for x on time payments.
   (My lender dropped my rate 1% after 12 months of on time payments; most do 18-24 months before you get the 1% drop. Some may do something tempting like a 2% drop after 48 months, but if you are on a 5-year payoff plan mathematically that probably is not be the best choice.)

·If you have a smaller loan at a higher rate consider keeping it out of the consolidation so it doesn’t pull up the rate on the rest of the (cheaper rate) loan (for example if you have a Perkins and a Stafford). No one will advertise that you can leave one loan out, so be savvy.

·Have the money to pay all outstanding interest. You don’t want that outstanding interest rolled into you new principal. (Paying interest on interest is bad!)

·With some lenders, but not all, consolidating eliminates your grace period.

·Consolidating a loan with a forgiveness option (like a Perkins) does eliminate the ability to ever get forgiveness for teaching in a low-income district, etc. You can elect to leave that loan out of consolidation if you are considering taking the forgiveness route.

·Do the hard work of the math when comparing the % breaks. They can be trickier than they look. MrsZubterfuge has a great spreadsheet in the middle of her bio that is helpful for doing long-term calculations. Use the mortgage pages from the spreadsheet in the middle of her bio here to play around with your SL repayment options:
http://community.thenest.com/cs/ks/user/page.aspx?username=MrsZubterfuge

*Important note:

Stafford loans taken out before July 1, 2006 have variable rates that, unconsolidated, will adjust as the rate changes each year. Waiting to see what the new rate effective July 1 will be can be very beneficial in your consolidation timing.

Stafford loans disbursed after July 1, 2006 have a fixed rate of 6.8% in repayment, so waiting to see what the new rate effective July 1 won't benefit you.

Here is a great article that talks about how to approach consolidation going into the 2008-2009 loan year:
http://articles.moneycentral.msn.com/CollegeAndFamily/CutCollegeCosts/3Point6PercentStudentLoansConsolidateNow.aspx

Sites for comparing student loan consolidators:
http://www.simpletuition.com/consolidation/quick_form
http://www.finaid.org/loans/staffordloandiscounts.phtml