School Loan Consolidation

The easiest way to reduce your student and school loan debt is to consolidate student loans. School loan consolidation results in lowered debt and payments if the average interest after consolidation is lower than it is before. This is really just refinancing one or a group of federal student loans, at a lower interest rate - just as refinancing a mortgage loan at a lower interest rate would reduce monthly payments and the total amount paid.

There are two basic kinds of school loans - private and federal. Federal school loans are almost always at a much lower interest rate than you could get for an unsecured private school loan. Because of the nature of the federal loans, you should never consolidate both private and federal loans into a single private loan. Because only federal loans carry government backing, they can be refinanced at a much lower interest rate than can privately financed school loans. So when you come to consolidate school loans, do the federal loans together then look at consolidating your private student loans.

Eligibility for federal student loan consolidation

You are eligible to consolidate federal student loans when:

# You are no longer enrolled in school (defined as being enrolled less than half time)
# You must be in the "grace period" of the loan or must be actively repaying your loan.
# Most consolidation companies require a minimum loan amount, $10,000 is typical.

The difference between federal and private student loans

Federal student loans have advantages over private loans. For example, interest on the loan is tax deductable, the loan can sometimes be forgiven for certain types of service, and you can sometimes defer payments on the federal loan if you go back to school.

Private loans don't have these advantages - they are really just loans either secured or unsecured, and you have to pay them back just like any other loan.

So, it's important to not consolidate federal and private loans together. Consolidate all your federal student loans first, then separately consolidate your private loans. If you were to mix the public and private loans you would have to take out a single private loan that loses all the benefits of the federal loans. Keep government student loan consolidation separate from private loan consolidation.

Student loan debt

About 50% of recent college graduates took out student loans, with an average borrowed around $10,000 (ref. 3). In the last three years, rates have fallen very low. As of fall 2003, Stafford loan interest rates were in 3-4% range (ref. 2). Consolidation interest rates can be much lower (under 2%), but this comes with very specific requirements - like good repayment history.

Like any debt, student loans can influence your credit and your future decisions. Students who borrowed a substantial amount for college (more than $5000) are less likely to pursue higher education (ref. 3). In addition, student loan debt that exceeds 8% of your income can be seen negatively when your credit gets assessed for future loans.

Two ways to reduce the debt burden are: 1) reduce or eliminate the principal balance. Specific types of loans can sometimes be forgiven by service or other higher education - look into the specific student loan program you have. 2) Reduce your monthly payment. Since debt burden is measured by comparing your loan payment to your income, reducing your payment helps your credit evaluation.