Consolidation takes multiple student debts and combines them into one single loan. Therefore, it can only occur when you have multiple student loans. You may have taken a loan for each term you attended college. This term-by-term structure is required by many lenders including the US Department of Education. You can consolidate these small loans, and you can also consolidate loans taken across years of undergraduate school and graduate school.
There are many reasons to consolidate. Ease of payment is just one potential benefit, but most borrowers are looking for financial savings. You can consolidate to a shorter payment plan or lower interest rate in order to save money. On the other hand, if you are struggling to make payments, you may consolidate to a longer plan with lower monthly payments. In both cases, there are realized financial benefits to moving to the single-loan structure.
Nearly any lender will be open to extending a consolidation loan. You may seek a loan through your existing lender, or you may approach a third-party. Remember: the terms you get on your consolidation loan will determine how much you save through the process. Search multiple options prior to deciding on the lender you will use for your consolidation loan.
Consolidation is a form of prepayment. The lender will lose some anticipated income in prepayment since the interest you would have owed over the life of the debt is cut short. Lenders may assess penalties to make up for this lost income. The penalties will range from relatively small fees to very negative credit information against you. For example, a lender can list the debt as closed in a manner unsatisfactory to them, and future lenders will be aware of the problem. It is essential to calculate the cost of penalties compared to savings you plan on achieving through the consolidation process. If the penalties are higher than the savings, it is not a good idea to move forward with your consolidation plan.
If you have student loans through the US Department of Education, you can consolidate without any penalty. This includes all Stafford Loans, Perkins Loans and even PLUS loans incurred by parents of students. Simply apply for a Direct Consolidation Loan through the US Department of Education to combine all of your debts into a single-payment plan. You will be quoted an interest rate and terms according to your history of payments and market factors (Federal Student Aid).
It is not wise to consolidate low interest loans with high interest loans. Keep your low interest loans separate in order to continue to benefit from the low rate. Aim to pay off your high interest consolidation loan first, since it is the most expensive, and slowly pay off your lower interest loans on a different time table.