Consolidating Student Loans
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UPDATED: May 25, 2011
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Unlike other types of loans for which borrowers are likely to have an arrangement with a single lender, student loans are often taken out in a variety of different loan agreements and may include loans that vary greatly in terms of interest rates, principal amounts, and repayment periods. Consolidating student loans is a step some students take to secure longer repayment intervals or to simplify payments with a single monthly bill.
Interest rates on student loans may seem to drop through consolidation on first glance, but in fact, the standard formula for consolidation take the weighted average of all outstanding loans and rounds the amount upwards to the nearest eighth of a percent. The final result is bound to be lower than the highest interest rate previously held by a borrower, but is also higher than the lowest rate that had been secured. The upward limit on consolidation loan interest rates is 8.25%.
All types of student loans, whether borrowed from the government or through a private lender, may be consolidated, typically without the use of any fees. Some programs may incorporate charges for consolidation, but such charges are deducted from disbursements and are not required upfront. While both students and their parents may have loans associated with a student’s education, multiple borrowers may not consolidate into a single monthly payment.
Consolidation programs for students offer a standard ten year repayment program, but many also provide extended options for lowering the monthly bill. Choosing an appropriate balance between monthly payments and the potential increase in interest over the lifetime of the loan is the most critical aspect of deciding how best to consolidate student loans.