Do you really want to be paying off your student loans when your children are in college?
Loan consolidation permits a borrower to extend the repayment term up to 30 years, depending on the total outstanding balance of the borrower’s education loans. For borrowers who cannot afford their monthly student-loan payments, this extended-repayment term can reduce their monthly installments. On the other hand, borrowers who have high balances and want to “refinance” their loans to take advantage of historically low rates could end up making consolidation-loan payments while they’re paying for their children’s college costs.

Lower interest rates don’t necessarily mean lower total interest costs.
Borrowers who consolidate to lock in a low interest rate and repay their loans over the extended period permitted by loan consolidation are likely to negate the benefits of the low rate. For example, a borrower who repays a $25,000 consolidation loan at 3.5 percent over a 20-year term pays approximately the same amount of interest as a borrower who repays $25,000 in unconsolidated Stafford loans over 10 years at a constant rate of 7 percent.

Balance affordable monthly payments against the shortest-possible repayment term.
Many loan-consolidation promotions tout the benefits of reducing a borrower’s student-loan payments by as much as 55 percent This payment reduction can be a benefit for some borrowers. Borrowers who consolidate primarily to lock in low interest rates, however, should select the repayment term that produces an affordable monthly payment and repays the loan in the shortest-possible period.

Borrowers can lose some benefits when consolidating Perkins loans.
Although federal law permits the consolidation of Federal Perkins loans, borrowers should be aware of some disadvantages. By consolidating, Perkins-loan borrowers give up the interest-subsidy benefit they receive if they qualify for deferment of their payments. In addition, Perkins borrowers may lose some loan-cancellation and deferment options by consolidating.

In-grace consolidation may be beneficial if you don’t mind giving up the rest of your grace period.
Borrowers who are in the six-month, post-school grace periods and consolidate Stafford loans issued since July 1, 1995, can obtain a slightly lower consolidation-loan interest rate than if they wait until their loans are in repayment. These borrowers should understand, however, that by consolidating they give up the remainder of their grace period.

Loan consolidation is probably not a good idea for borrowers in the last year of repayment.
Stafford-loan borrowers who are in the final year of their repayment term automatically receive the new, lower Stafford-loan rates effective July 1, 2003, through June 30, 2004. By consolidating, these borrowers are likely to receive a higher interest rate because the formula for calculating consolidation rates rounds the rate up to the nearest one-eighth of 1 percent.

Borrowers should consider additional issues regarding loan consolidation.
Borrowers should ask if the lender offers consolidation-loan borrower benefits to further reduce interest costs. Borrowers should understand which organization will service their consolidation loan, where they will make payments and what level of customer assistance they can expect from the servicing entity. Borrowers also should find out if the lender offers an online-application process and how long it takes to process the application. In addition, borrowers should explore the level of loan-consolidation counseling they receive from the lender/servicer.