School Loan Consolidation: Questions and Answers

How do I know if I should consolidate my student loans?

Before consolidating your student loans, you should carefully weigh the pros and cons. Do the benefits - lower monthly payments, fixed interest rates, less paperwork - outweigh any possible disadvantages, like the chance of paying more total interest? Could you lose some possible benefits related to your current loans if you consolidate them? It's important for you to research all your options before you move forward with consolidation.

There are several online tools that can assist in determining whether consolidation is the most strategic repayment plan for your situation. For example, the U.S. Department of Education provides an online calculator that allows visitors to estimate what their monthly payments would be under the four federal Direct Consolidation Loan repayment plans.

Can I consolidate my student loans with my parents' loans?

No. Student borrowers and respective parent borrowers are unable to consolidate their loans together. Consolidated loans must be from the same borrower.

Can I consolidate my student loans with my spouse's loans?

No. Married students are unable to consolidate their loans together. Prior to July 1, 2006, married couples did have this option. However, such consolidated loans could not be separated if a couple divorced. The Higher Education Reconciliation Act of 2005 repealed this provision in order to avoid such a challenge.

Can you consolidate a consolidation loan?

Yes, but only once and you must add new loans to the original consolidation loan. You also can consolidate two separate consolidation loans together into one. Keep in mind that you are able to consolidate a consolation loan only once during the lifecycle of that loan.

When can I consolidate my school loans?

Students must wait until they enter the loan's grace period or after the loans enter repayment status. A student also is able to consolidate their loans if those loans are in default status but have satisfactory repayment arrangements. Students are not able to consolidate their loans while they are still in school. However, parents are able to consolidate PLUS loans while their children are still students.

Will consolidating my student loans hurt my credit rating?

No. Compared to other types of debt, student loans, including consolidation loans, are considered to be "good debt." However, you should keep in mind that defaulting on your student loans will negatively impact your credit rating.

Will consolidating my student loans lower my overall interest rate?

No. A common misconception regarding consolidating student loans is the new loan will offer a lower interest rate, which is not necessarily the case. The interest rate for a consolidation loan is the weighted average of the interest rates for the various loans being consolidated, rounded up to the nearest .125 percent and capped at 8.25 percent.

So what does all that mathematical jargon actually mean?

Ultimately, the interest rate for your consolidation loan will end up somewhere in between your highest and lowest interest rates. In many cases, the interest you pay over the lifetime of your consolidation loan will be about the same as you would have paid on the multiple loans.

The one exception to this rule is known as the PLUS Loan Interest Rate Loophole. Because of the 8.25 percent cap for consolidation loans, a borrower with an 8.5 percent fixed-rate PLUS loan could reduce the rate by 0.25 percent.

Can consolidating my student loans save me money?

It is possible but you'll need to shop around. While a consolidation loan's original interest rate is the weighted average of the interest rates for the consolidated loans (rounded up to the nearest .125 percent), lenders are able to provide special discounts that could result in a lower interest rate. For example, a lender might offer a special discount, such as a 0.25 percent interest rate reduction, if loan payments are debited directly from your bank account.

However, many discounts are not permanent and can be lost. Some lenders might offer a discount based on timely payments. If you miss just one due date, you could lose the discount and return to the original interest rate.

The more information you collect from potential lenders, the more informed your decision will be and the better chance you'll have of finding special discounts that could result in savings for you.