Consolidating Your Federal Student Loans

If you are like most Americans, you have left school with thousands of dollars in student loans (the average is about $20,000 for a four-year undergrad degree). If you have gone through graduate school, you may owe tens of thousands of dollars on your student loans. It can be discouraging to finish school, look around, and realize that you owe as much for you education as a house would cost. And to make matters worse, often those federal loans are a mix of subsidized and unsubsidized loans. Plus, they are often divided up into separate loans per year – or even per semester. You could have as many as eight or more separate loans, each with its own interest rate and monthly payment, depending on what the rate was when you got each loan.

Instead of paying each loan individually, which can become expensive and frustrating, you can combine your federal student loans into one consolidation loan. This has a couple of advantages. First, you will be able get rid of multiple federal loans and just worry about making one loan payment each month. Second, you will be able to lock in an interest rate. Even though Federal loans cannot exceed an 8.25% interest rate, they are still variable, ranging from a 2.75% rate on up. I was able to consolidate my loans to a fixed rate of 2.75% prior to the July 1, 2005 rate increase. The rate is expected to increase again this summer, to as much as possibly 7%.

If you are out of school, you can consolidate your Federal student loans, locking in current rates and avoiding paying for the rise. This can be a great boon, as it relieves you from paying increases each time the rates increase. However, it is important to remember that this applies only to Federal loans. You cannot lump any private education loans you received in a consolidation loan with the Federal student loans and get the special rates. However, it is possible to consolidate your private loans through another process. Additionally, you must be done with school and in a grace period. In order to consolidate undergraduate loans, you must be done with your undergraduate schooling. In order to add graduate loans to the mix, you must have finished your advanced degree. It is possible to consolidate your undergraduate and graduate loans together (I did this), but you have to have the degrees of loans you want consolidated finished.

You can get an advantage out of consolidation, but you should realize that this often extends the life of the loan (usually from 7 to 10 years to 20 to 25 years). As soon as you can afford to make larger payments and pay off the loan sooner, you should make the necessary arrangements.

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