All About Federal Student Loan Consolidation
A common thing to do in today’s consumer society is to refinance your mortgage. We’re used to thinking about mortgages in this term - home-owners routinely refinance two and three times in the course of the loan in order to save thousands of dollars in interest, which they would have otherwise paid. But did you know that you can also refinance or consolidate your student loan? This can save thousands of dollars in interest expense, and also a well-timed consolidation can cut a borrower’s monthly payments down to a size that is much easier to deal with.
The two most common kinds of federal student loans in use today are Stafford loans and PLUS loans. The Stafford loans are for students and the PLUS loans are for parents of students. At this time, these loans have variable interest rates which are the lowest they have been in over thirty years. Stafford loans currently have a variable rate of 3.46% during the time that the student is in school, and 4.06% during repayment. PLUS loan interest rates are currently 4.86% regardless of whether the student is in school or repaying. Here’s another article on loan consolidation using the government.
If those rates were to hold over the entire course of the standard decade-long repayment term, there would be little point in refinancing. But the point is that federal student loan interest rates reset every year on the first of July. The rates vary from year to year, but Stafford loans rates are capped at 8.25%, while the PLUS is capped at 9%.
The benefit to refinancing a student loan, then, is that the borrower can lock in a lower interest rate. One handy formula for determining a federal consolidation loan’s total interest rate is to figure the weighted average of the interest rate on the loan and round it up to the nearest eighth of a percentage point. Then compare the interest on the same loan if it were refinanced. For example, if you only have a Stafford loan, and it was in repayment, the variable interest rate on these loans is currently 4.26%, and the fixed interest rate for your consolidation loan is 4.125%. That would stay fixed for the life of the loan. But remember that interest rates reset every July, so the time to pounce on a lower rate is during the year that it’s current.
There are still other advantages to consolidating a federal student loan. When you also consider extended repayment and graduated repayment options, your monthly payments can be cut by as much as half. This is especially helpful for recent graduates who are trying struggling to repay their obligation while interning or getting started in their new career. Of course, as always, consolidation still lets the borrower make a single payment to a single lender, in the cases of having multiple lenders and multiple monthly payments. You don’t need to worry about consolidating a student loan, because doing so is free, with no fees charged for consolidation.
A number of lenders are offering competitive incentives to get borrowers to consolidate with them. This makes sense when you consider that the terms of a federally created student loan have to be the same, regardless of who lends you the money. Commonly, private loaners offer a 25% interest rate discount when you agree to make payments electronically.
More significant are the discounts offered by some lenders for borrowers who keep up on their monthly payments. These discounts on interest, kind of a “money off for good behavior” kind of deal, range from 30 to 60 payments minimum before they kick in, but the savings are worth it.
There are many federal student loan consolidators handling a large volume of loans. The average consolidation is completed within two months of applying. The number of applicants seeking consolidation, however, rises sharply in June due to the July deadline, so count on the process slowing down in the summer. Once you decide that it’s the right time to consolidate, a speedy pursuit is the only sensible option.
Students now have many more choices available to them. Take advantage of that. Here’s a source I like - government student loan consolidation it’s worth considering over and above many others.