Confused About Consolidation?

Get the Facts Before You Decide

The concept of student loan consolidation is simple: you apply for one large loan which will be used to pay off all your existing student loans. That single loan will be easier to manage, because you’ll only make one monthly payment, and because it has a longer term than your old loans that payment will be smaller than the sum of your current payments. However, debt consolidation is sometimes a tradeoff, an exchange of easier payment terms for a more expensive loan, since you may pay more interest on the same sum over a longer period of time.

The ideal consolidation loan would be one in which you took advantage of a financial trend to secure a lower interest rate, or were able to do so because of your excellent payment history, without extending the term of any existing loan. However, if your choice lies between consolidating existing loans while paying more interest over time and falling behind in your individual loan payments, you should take the consolidation loan.

Should I Consolidate My Student Loans?

As you see, deciding whether consolidation is the right course for you depends not only on your current situation but also on the terms of the new loan. If you have both federal and private student loans, you will have to consolidate those types of loans separately. The U. S. Department of Education (USDOE) has established a well-documented system of rules for federal student loan consolidation, and each private lender has its own guidelines for acceptable consolidation plans.

To guide you in making a decision about student loan consolidation, you can try a simple online assistant introduced by USDOE in the middle of 2012 to help students understand the basic principles of personal finance and apply that knowledge to their management of their student loans. The assistant is called the Financial Awareness Counseling Tool (FACT), and it consists of a series of tutorials based on information from your own government loans, using that information to create a personalized analysis of your financial situation and offer appropriate advice.

You’ll have an opportunity to add financial details from other sources to the data used by FACT.

Federal Student Loan Consolidation

The Pay As You Earn Plan: A Possible Alternative

The government has a strong interest in making it possible for students to pay off their educational loans, and at the end of 2012 it instituted a new form of the income-based repayment plan called Pay As You Earn (PAYE). PAYE is designed to lower your monthly student loan payments, and thus you must have a partial financial hardship to qualify for the plan. The government defines the needed partial financial hardship as the condition existing when the monthly payment amount you would be paying under the Standard Repayment Plan exceeds the amount you would pay every month under PAYE.

That is a circular definition, but nevertheless a clear one after the two amounts are calculated and compared. Federal loans that are eligible for inclusion in the PAYE calculation are any Direct loans plus certain types of Federal Family Education Loan (FFEL or Stafford) loans, although no Stafford loans can be repaid using PAYE. There are other requirements discussed on the linked page (you must qualify as a new borrower beginning in 2007, not all Direct loans can be repaid under PAYE), but there is one outstanding benefit: if you do succeed in meeting the criteria, you will keep your eligibility even if your financial circumstances improve, eliminating your hardship.

How Federal Student Loan Consolidation Works

If even the PAYE plan will not address your financial difficulties, then you should look into student loan consolidation. The federal government has set up a website to organize its Direct Loans consolidation information in one place. Here is an outline of the eligibility requirements for a Direct Consolidation Loan:

• You must have one Direct Loan or Federal Family Education Loan, at minimum, falling into one of these four status categories: grace, repayment, deferment, or default.
• You can sometimes consolidate loans in default if you have either arranged an adequate repayment schedule for each or intend to repay your Direct Consolidation Loan by way of Income Contingent Repayment or Income-Based Repayment (definitions listed here).
• While you’re usually expected to use an FFEL consolidation loan if you have only FFEL loans, there are a few special circumstances under which you can substitute a Direct Consolidation Loan. You must have failed to secure an FFEL consolidation loan, secured one that does not offer a repayment plan tailored to your income, or have plans to submit your debt to the Public Service Loan Forgiveness Program.

Once the question of your eligibility has been settled, you can apply for a Direct Consolidation Loan in one of three ways: online, using a paper copy of the application form, or if you have only Direct loans the third option is by phone.

Helpful Resources

One Private Lender’s Rules: Wells Fargo

If you’d like to see a standard example of how a private lender handles student loan consolidation, you can visit Wells Fargo’s page. You can choose a fixed or variable rate, unlike federal consolidation (which is fixed rate only), and your repayment schedule begins immediately. There are two discounts for which you may qualify, one for authorizing automatic payment from a checking or savings account and another for existing Wells Fargo customers (called the relationship discount).

Amount totals eligible for consolidation with Wells Fargo range from $5,000 to $100,000.

Other Places to Find Information About Consolidation

Your student loan lender can provide a free consultation and will already have detailed knowledge of your finances, which will be particularly helpful. The New York Times online has posted a wealth of information on all aspects of college, including a guide to different ways of managing student loan debt. For example, the guide briefly discusses how to work loan forgiveness into your consolidation plan, which presents an interesting avenue for erasing debt.