A change in the law in 2006 means that borrowers in the USA are no longer obliged to stick with their original lender when they're consolidating student loans. The "single holder" rule gave students no choice but to stay with the lender that their existing student loans were obtained from. The good news is that you can now apply for consolidating student loans from any approved lender. The bad news is that the information and products they offer can be overwhelming!
The Federal Consolidation Loan program.
Federal student loans include:
Stafford (subsidized and unsubsidized)
Federal Perkins loans
HPSL (health professions),
HEAL (health education)
LDS (loans for disadvantaged students)
PLUS loans (graduate and parent loans)
When you're considering consolidating student loans, note that private loans cannot be considered under federal consolidation loan program. One of the main advantages of consolidating student loans is that the interest rate is fixed and the repayment period is longer, making your monthly payments lower than the amount of your existing combined student loans. This is great if you have variable interest loans and eliminates the uncertainty of rising interest rates in the future. In addition to this, you have only one payment to make if you are consolidating all of your student loans, and there are no credit checks or fees so consider.
Consolidating student loans with the federal program does, however, have its drawbacks. Paying any debt over a longer period of time means more interest overall, and consolidating student loans in this way could result in a higher cost over the full term of the loan. You could also be paying a higher interest rate, as the fixed rate on your consolidating student loans might be above that of your existing agreement in the future.
The best time to look at consolidating student loans is within the grace period - the six months after graduation - as the interest rate is lower. If you miss this deadline though, you can still apply but you will be a slightly higher rate.
Choosing the right lender when consolidating student loans.
First of all, the government determines the maximum interest rate so all lenders have to adhere to this. To attract your custom in consolidating student loans, many lenders will offer incentives such as a discounted rate for making repayments on time, or for making monthly payments by direct debit.
Take time to look at the various consolidating student loans that are available. While some of the discounts come across as attractive initially, you need to consider the possibility that making every repayment on time could be difficult, or that electronic payments may not suit you in the future.
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