Savings and Convenience Are Key Benefits
Your child may have taken out several loans to help pay for college. These loans may be with different lenders and have different interest rates.
If so, your child should consider consolidating the loans. A loan consolidation means taking out one loan to pay off other loans. This creates a new, combined debt.
These loans often let borrowers get lower interest rates that are locked in. Loan consolidation also offers the convenience of making only one loan payment per month, instead of several payments.
Federal Consolidation Loans
Beginning July 1, 2010, all federal consolidation loans are made through the federal Direct Loan Program. This means that all consolidation borrowers have the same lender, the U.S. Department of Education.
If your child has federal education loans to consolidate, contact the financial aid office at your child’s college or go to the federal government’s Direct Consolidation Loan website.
Consolidating one or more federal education loans into a new loan offers several advantages:
The minimum monthly repayment amount on a federal consolidation loan may be lower than the combined payments on a borrower’s federal education loans.
Having only one lender and one monthly payment makes it easier to manage debt. Payments can be made electronically by enrolling in the Electronic Debit Account (EDA) program.
There are multiple plans to choose from, including a new Income Contingent Repayment (ICR) Plan.
Borrowers can switch between repayment plans as their needs and financial situations change.
Private Consolidation Loans
If your child has private loans to consolidate, contact the current lenders. You should also research private consolidation loans available from other lenders and evaluate all options.
Here are some points to keep in mind:
The primary benefit of private loan consolidation is to obtain a single monthly payment; your child is replacing two or more private education loans with a single loan.
Interest rates on private consolidation loans are based on credit scores; borrowers may be able to get a lower rate through consolidation if their credit score has improved significantly since the original loans were initiated. This reduces the overall cost of the loan.
Private consolidation loan costs can vary significantly, depending on whether the rate is variable or fixed, what fees, if any, are charged, and if there are prepayment penalties. Be sure to shop around for the loan with the best price overall.
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