Student-Loan Consolidation Programs

Convenience and Cost Savings Are Key Benefits

While interest rates on education loans are currently at low levels, they may begin to rise again. For students with several federal education loans, a federal consolidation loan can provide a way to continue benefiting from today's low rates. A federal consolidation loan pays off the student's other federal education loans and allows him to lock in a low fixed rate. The program also offers the convenience of making only one loan payment per month, instead of several payments.

What to Look for in a Loan

How do you go about choosing a federal consolidation loan? The key terms for federal consolidation loans are the same, regardless of the lender. No lender may charge any extra fees to the borrower, such as origination or application fees, or a prepayment penalty. Lenders are all subject to the same interest-rate formula, although they may charge less than the maximum allowed. Federal law also establishes the payback period.

When comparing federal consolidation loans, find out what benefits, such as a lower interest rate, are available from each lender. Ask the lender to estimate how much its particular benefits will reduce the total amount of all payments for the loan if payments are made on time. For example, if a lender offers a five-year loan with monthly payments of $100, then the total amount of all payments for this loan would be $6,000 (5 years × 12 months per year × $100 per month). Then find out the total amount of all payments for other lenders and compare those to the $6,000 figure offered by this particular lender. If another lender offers a number of less than $6,000, then that would be a cost savings. A figure higher than $6,000 means an additional cost. If payments are not made on time, then penalties may be charged, and this would increase the total amount of all payments on the loan.

Watch Out for Private Loans

While private consolidation loans are also available, be aware that private lenders are not subject to the terms stipulated for federal consolidation loans. Private loans may involve fees, variable rates, or prepayment penalties. Furthermore, certain benefits are not available on a private consolidation loan. These include benefits such as federal interest subsidies during a deferment period, in which the federal government pays the interest on a loan during the period in which payments are deferred. Federal consolidation loans are therefore the better way to go.

Information on a Federal Loan

One organization that offers federal consolidation loans is Sallie Mae. For more information on Sallie Mae's SMART LOAN Consolidation program, visit www.salliemae.com/consolidation.

Fixed Rates May Change to Variable

While locking in a low fixed rate can save you money, be aware that fixed rates may eventually be a thing of the past. This is because when Congress reauthorizes the Higher Education Act, all federal student loans subsequently issued may be subject to variable rates. If this measure is enacted, loan rates will fluctuate each year according to the general direction of interest rates, and monthly payments will be adjusted accordingly.

The financial impact of variable rates over the life of a consolidation loan will depend on whether rates go up or down. Declining rates will lower the monthly payment, while rising rates will increase the monthly payment.