At its most basic form, a loan consolidation is when one lender agrees to pay off other loans in return for you agreeing to pay off a new loan. If you are considering consolidating your loans it’s a good idea to look at all the terms and programs that are associated with your existing loan. Then decide if the new loan and its terms are superior.
Making a mistake with your loan consolidation decisions could end up costing thousands of dollars. Typically a loan consolidation will include over ten thousand dollars and could potentially involve well over $100,000. Given the amount of money involved in this transaction the prudent approach is to treat it like you would buying a house or a car. This site will offer many examples and suggestions and will even answer your specific questions, but it should only be part of your research. Talk to your lenders, ask questions, get all the facts, and make the most informed decision possible.
Federal Student Loan consolidation can only be done at studentloans.gov. The paperwork does not take too long, however, the wait period for consolidation can take up to 3 months. During that time the Federal Loan Consolidation people will contact all of your federal loan servicers. They will come to terms on your behalf. At the conclusion of this process you will receive a letter in the mail saying that the following loans will be consolidated and you have 15 days to respond if you want to prevent the consolidation. This will be your very last chance to stop the consolidation as there is no process to “unconsolidate” your loans.
Reasons to Consolidate:
→ If you have FFELP loans (such as graduate PLUS) and want to qualify for public service loan forgiveness loan consolidation is a must. A direct consolidated loan is eligible for the program but the individual FFELP loans are not.
→ If you are going to be applying to IBR or PAYE each year, consolidating means that you will only have to deal with one loan servicer.
→ Consolidation can help your credit score. If you have many individual student loans, consolidation will appear on your credit report as the individual loans being paid off and the new large loan being a new loan. Even though the total debt is the same, fewer open loans typically will improve your score as does paying off debt.
→ Dealing with one servicer each month is much easier than having to deal with multiple loan servicers. Also, consolidated loans appear to typically end up being serviced by myfedloan. Though its not a guarantee, myfedloan is usually the easiest federal loan servicer to work with.
Reasons not to Consolidate:
→ If you want to pay back your loans on an IBR plan it is critical that you only have IBR eligible loans added to your consolidated loan. If you add a loan that is not eligible, the entire consolidated loan becomes ineligible for IBR.
→ If you consolidate immediately after college you lose the remainder of your standard 6 month deferment.
Sherpa Tip #1: Loan consolidation is not an easy process. Pay close attention to what you are doing and don’t rely on what your loan servicer tells you about consolidation. Sallie Mae may tell you it’s not the best idea for you or not worth it. Remember, their job is to collect your monthly payment, not offer financial advice.
Sherpa Tip #2: Many private lenders may offer to consolidate your federal student loans. This is almost NEVER a good idea. The student loan repayment plans offered by the federal government will almost always be superior to the terms offered by a private lender. If you are even considering going this route, be sure to read the fine print, and know that in doing so you may lose out on benefits such as loan forgiveness, unemployment forbearances, and Income Based Repayment.
Sherpa Tip #3: Learn from my experiences dealing with Federal Direct Student Loan Consolidation.