| Debt consolidation entails taking out one loan to pay | | | | your loan, your monthly payment can be significantly |
| off many others. This is often done to secure a | | | | lower with a consolidation loan, although you may pay |
| lower interest rate, secure a fixed interest rate or | | | | more in total interest over the life of your loan. |
| for the convenience of servicing only one loan. | | | | When should you consolidate? |
| Debt consolidation can simply be from a number of | | | | Only loans that are in grace, deferment, forbearance, |
| unsecured loans into another unsecured loan, but | | | | or repayment can be consolidated into a Federal |
| more often it involves a secured loan against an | | | | Consolidation Loan. Loans that have an in-school |
| asset that serves as collateral, which is most | | | | status cannot be consolidated. |
| commonly a house (in this case a mortgage is | | | | There are no deadlines. However, Federal Stafford |
| secured against the house.) The collateralization of | | | | Loans that are in the grace period (or in deferment) |
| the loan allows a lower interest rate than without it, | | | | have the lower rate compared to loans in repayment |
| because by collateralizing, the asset owner agrees to | | | | (or forbearance). Because the current interest rate is |
| allow the forced sale (foreclosure) of the asset in | | | | used in the calculation to determine the weighted, |
| order to pay back the loan. The risk to the lender is | | | | fixed interest rate of your consolidation loan, you will |
| reduced so the interest rate offered is lower. | | | | save money over the long run if you consolidate |
| Because of the theoretical advantage that debt | | | | while in your grace period or while in deferment. (If |
| consolidation offers a consumer that has high interest | | | | you choose to consolidate while in your grace period, |
| debt balances, companies can take advantage of | | | | keep in mind that your grace period will be cancelled |
| that benefit of refinancing to charge very high fees | | | | when the consolidation loan is issued and you will |
| in the debt consolidation loan. Sometimes these fees | | | | begin repayment.) |
| are near the state maximum for mortgage fees. In | | | | Student loan consolidation |
| addition, some unscrupulous companies will knowingly | | | | In the United States, federal student loans are |
| wait until a client has backed themselves into a | | | | consolidated somewhat differently, as federal student |
| corner and must refinance in order to consolidate and | | | | loans are guaranteed by the U.S. government. In a |
| pay off bills that they are behind on the payments. If | | | | federal student loan consolidation, existing loans are |
| the client does not refinance they may lose their | | | | purchased and closed by a loan consolidation |
| house, so they are willing to pay any allowable fee to | | | | company or by the Department of Education |
| complete the debt consolidation. In some cases the | | | | (depending on what type of federal student loan the |
| situation is that the client does not have enough time | | | | borrower holds). Interest rates for the consolidation |
| to shop for another lender with lower fees and may | | | | are based on that year's student loan rate, which is in |
| not even be fully aware of them. This practice is | | | | turn based on the 91-day Treasury bill rate at the |
| known as predatory lending. Certainly many, if not | | | | last auction in May of each calendar year. |
| most, debt consolidation transactions do not involve | | | | Student loan rates can fluctuate from the current |
| predatory lending. | | | | low of 4.70% to a maximum of 8.25% for federal |
| What is a Federal Student Consolidation Loan? | | | | Stafford loans, 9% for PLUS loans. The current |
| A Federal Consolidation Loan is a loan that you can | | | | consolidation program allows students to consolidate |
| use to pay off all or a portion of your original eligible | | | | once with a private lender, and reconsolidate again |
| federal student loans. You combine (consolidate) your | | | | only with the Department of Education. Once the |
| existing federal student loan debt into one new loan. | | | | student has consolidated their loans, the loans are set |
| What are the terms of a Federal Consolidation | | | | to a fixed rate based on the year they consolidated; |
| Loan?o The interest rate on a Federal Consolidation | | | | reconsolidating does not change that rate. |
| Loan is fixed, meaning it will not change over the life | | | | Federal student loan consolidation is often referred to |
| of the loan, even if the interest rates on other | | | | as refinancing, which is incorrect because the loan |
| federal loans go up (or down).o The interest rate is | | | | rates are not changed, merely locked in. Unlike |
| calculated from the weighted average of the interest | | | | private secton debt consolidation, student loan |
| rates of yourexisting loans, rounded up to the | | | | consolidation does not incur any fees for the |
| nearest 0.125%, with a cap of 8.25%.o There are no | | | | borrower; private companies make money on |
| fees to apply for or receive a Federal Consolidation | | | | student loan consolidation by reaping subsidies from |
| Loan.o The repayment term is up to 30 years, | | | | the federal government. |
| depending on the total amount of your student loan | | | | Student loan consolidation can be beneficial to |
| debt, and there is no pre-payment penalty. | | | | students' credit rating, but it's important to note that |
| Why should you consider consolidation? | | | | not all federal student loan consolidation companies |
| With a Federal Consolidation Loan, you can benefit | | | | report their loans to all credit bureaus; SLM |
| from:o Lower monthly paymentso Fixed interest | | | | Corporation (formerly Sallie Mae) does not report to |
| rateso Only one payment for your federal loans each | | | | Experian or Transunion, which means that students |
| montho New or renewed deferments | | | | will have differing credit scores at Equifax, |
| Because you are allowed up to 30 years to repay | | | | Transunion, and Experian. |