Educational Loan Consolidation
Educational Loan Consolidation
Educational Loan Consolidation, combines several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans.
Educational Loan Consolidation are available for most federal loans, including FFELP (Stafford, PLUS and SLS), FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans and Direct loans. Some lenders offer private consolidation loans for private education loans as well.
Educational Loan Consolidation often reduce the size of the monthly payment by extending the term of the loan beyond the 10-year repayment plan. Depending on the loan amount, the term of Educational Loan Consolidation can be extended from twelve to thirty years. The reduced monthly payment may make the loan easier to repay for some borrowers. However, by extending the term of Educational Loan Consolidation the total amount of interest paid is also increased.
In some cases for example, when one or more of the loans was being repaid in less than ten years because of minimum payment requirements, an Educational Loan Consolidation may decrease the monthly payment without extending the overall loan term beyond ten years. In effect, Educational Loan Consolidation gets extended to ten years. The total amount of interest paid will increase unless one continues to make the same monthly payment as earlier, in which case the total amount of interest paid will decrease.
Often it’s a common misconception that a student can consolidate only once in a lifetime. Borrowers can consolidate multiple times, so long as each new consolidation loan includes at least one unconsolidated loan. However, reconsolidation does not allow one to ‘relock’ the interest rates on a running Educational Loan Consolidation. Once the interest rate on a Educational Loan Consolidation is fixed, it does not change.
Repayment on an Educational Loan Consolidation begins within sixty days of disbursement of the loan, unless the borrower qualifies for a deferment or forbearance.
The conventional wisdom is that students with bank-based federal student loans i.e., funded by a bank or other financial institution can only consolidate their loans during the grace period or after the loans enter repayment. However, there is a loophole that allows students to Educational Loan Consolidation while they are still in school by first asking that the loans be put into repayment status early. Once the loans are in repayment, they can be consolidated, locking in the repayment interest rate.
After the loans are consolidated, the student asks for an in-school deferment to delay the repayment obligation until after they graduate.
If a student consolidates the loans into Educational Loan Consolidation before they enter repayment, the interest rate used is the lower in-school interest rate.
Thus students with loans from the Direct Loan program should Educational Loan Consolidation during the in school or grace periods to lock in a lower interest rate. Students with federal student loans from a bank or other financial institution should consolidate during the grace period to lock in a lower interest rate.