A college education can open up countless doors for individuals, such as enhanced career choices and higher earning potential. Unfortunately, seeking a higher education also can result in considerable debt stemming from multiple school loans.
In fact, college students racked up $85 billion in school loans in 2007-08, according to Trends in Student Aid 2008, an annual report conducted by the College Board, a non-profit association. The same report showed that the average debt per borrower totaled $22,700 for the 2006-07 academic year.
Managing that much debt, often spread among several lenders, can be daunting. However, there is a possible solution to this financial juggling act: student loan consolidation.
Through school loan consolidation, a borrower is able to "combine" his or her multiple student loans via a single new loan. This step can not only streamline one's monthly finances but also provide a lower total monthly payment.
In many ways, consolidating student loans is a lot like refinancing a mortgage or car loan, and just like these two financial options, consolidation is not necessarily the right fix for everyone's student loan challenges.
It's important to weigh all the pros and cons before moving forward with a consolidation loan. For example, you might have a lower monthly payment, but when all is said and done, you could end up paying a lot more interest in the end.
In addition to helping to streamline your monthly finances, consolidating your education loans can benefit you in other ways.
If your parents have PLUS loans with interest rates at 8.5 percent, consolidating those loans could provide a lower interest rate because consolidation loan interest rates are capped at 8.25 percent.
Additionally, consolidation loans have fixed interest rates while federal Stafford loans have variable rates that change annually. Combining these loans would allow you to lock into one interest rate.
Furthermore, many lenders offer special discounts, which could result in a lower interest rate for the consolidation loan if certain criteria are met.
Once you've done the math and determined whether a consolidation loan will assist in your long-term financial goals, the next step is finding the right lender.
In the past, it was tricky to switch lenders when consolidating school loans. Today, however, you can apply for a consolidation loan through any qualified lender, even if all of your current loans are with a single different lender.
There are two primary programs available for consolidating school loans:
Deciding between these two programs will depend on various factors, including what type of student loans you plan to consolidate. For example, to qualify for a Direct Consolidation Loan, borrowers must have at least one Direct Loan or Federal Family Education Loan.