There are two types of student loans: private and federal. Private student loans usually come directly from banks. Federal student loans are either subsidized or unsubsidized and they're arranged through your school's financial aid office after you fill out the Free Application for Federal Student Aid.
Just as there are private and federal loans, there are also private and federal consolidation programs. In fact, if you're thinking about consolidating your student loans, you should know that the two kinds of loans shouldn't be consolidated together.
Federal loans have a locked-in interest rate. This interest rate changes every year, but it has a cap of 8.25 percent. Any federal consolidation should go through a federal lender or the U.S. Department of Education's Federal Direct Loan Consolidation program. By using this program, your federal loans will keep their interest cap.
When the economy is down, some federal lenders will suspend their consolidation programs because it's simply not profitable for them to take on new consolidation debt. Even if certain lenders suspend their efforts, though, the U.S. Department of Education program will still offer federal student loan consolidation programs.
Private loans and consolidation, on the other hand, are subject to the interest rates of the individual lenders. In most cases these consolidation loans will have a higher interest rate than the federal rate. Private consolidation interest rates may be adjustable, they may change, and they are not capped.
On the other hand, private consolidation programs are not likely to suspend when the economy is down. Their interest rates still might not be as favorable as the federal rates, though. Also keep in mind that origination fees may occur with private consolidation loans.
You don't want your federal loans to be folded into a private consolidation. Your interest rate on a federal loan will be higher with a private consolidation than if you'd applied for federal consolidation. If you have private loans, however, they can only be consolidated with private lenders. There's no federal consolidation program for private loans.
You can only consolidate your federal student loans once, unless you add more student loans later, so weigh all the options before you commit to a consolidation.
When you're thinking about student loan consolidation, ask potential lenders about available discounts. Some lenders offer lower interest to borrowers who use direct deposit, for example. Also keep in mind that if your original lender gave you special rebates, you may be required to pay those rebates back if you consolidate with someone else. Ask before you consolidate.