It is easy to apply for loans while you’re in school, but once you graduate, repayment can be complicated, especially if you borrowed from multiple lenders.  Loan consolidation can help make paying back loans a little easier.  When you consolidate student loans, your new lender buys all of the loans you got from other institutions and combines them into one.  Here are five items to keep in mind if you’re considering consolidating your private student loans.

  • Look to credit unions.  Because most of their customers are older, credit unions frequently offer low interest rates on student loan consolidation in order to attract new business.  You can use this to your advantage and secure a lower monthly payment on your loans, based on your educational accomplishments, employment, and credit history.  If you think you’ll need a cosigner, a credit union might make the process less risky for both of you – with some agreements, the cosigner is freed of their obligations as long as the loan borrower makes payments on-time for one or two years.
  • Ask questions.  Since a repayment plan can last ten to twenty years (and maybe longer), it is essential that you understand what you’re agreeing to.  Find out what your interest rate will be, and whether it is fixed or variable.  Ask about what discounts you could receive or any extra charges you might incur, such as origination fees or making payments with a credit card.  Most importantly, ask your lender about any prepayment penalties – even if you’re just trying to lower your bills for now, you might be able to make additional or larger payments in the future.
Consolidation Plan

Consolidation Plan

  • Avoid consolidating private and federal loans.  Although it might seem easier or more efficient to consolidate all your loans together, keep your federal student loans separate from your private student loans.  Federal student loans already have built-in protections to ensure that your interest won’t skyrocket, and most private institutions won’t let you consolidate your federal loans with your private loans anyway.  Most private loans have higher interest rates than those offered on federal loans, meaning that you could end up with a higher interest rate than the one you already have.  Even if you can find a way to consolidate your federal student loans with private loans, it is unlikely that it will be to your advantage.
  • Find out if you’re protected.  Federal student loans offer a number of repayment and payment deferment plans, but private lenders might not be as flexible.  Find out if your new consolidated loan will defer payments if you go back to school, are unemployed, or have some other obligation that makes loan payment difficult.  Compare the terms of consolidation with the terms on your existing loans to see if you are really getting a better deal.
  • Be aware of the long-term consequences.  Consolidation might result in lower monthly payments, but make sure you’re aware of the overall cost.  By repaying less each month, your loan will take longer to pay off and will still collect interest.  This means that you could end up paying twice the amount interest you would have originally owed.

Regardless of your decision, it is essential that you keep track of your loans in order to avoid paying interest or fees you otherwise could have avoided.  Consolidation can help with this since it can reduce your monthly payments, but remember that if you’re not careful, it could cost more in the long run.