USA Funds advises student-loan borrowers to consider loan consolidation carefully
Submitted by Mae Dunn-St. Julien, Sandy Holt and Adriana White, USA Funds Services

With interest rates on federal student loans expected to increase significantly, effective July 1, loan consolidation is an attractive option for many federal student-loan borrowers.

Federal Consolidation loans offer fixed interest rates that permit borrowers with variable-rate federal education loans to lock in the current record-low student-loan-interest rates. Borrowers need to be aware of the potential pitfalls as well as the benefits of loan consolidation, however.

USA Funds® offers the following tips to share with education-loan borrowers considering consolidation:

Check with your current lender. If all of a borrower’s student loans are held by a single entity, federal law requires that the borrower first request loan consolidation from that entity. If a borrower’s loans are held by several loan providers, the borrower may contact any one of those providers or any other consolidation lender. In selecting a lender, borrowers should consider the ease of the application process; the level of customer service, including counseling about loan consolidation; and any interest-saving borrower benefits that the lender may offer. Some organizations that are promoting Federal Consolidation loans are marketing agents, not lenders. Borrowers should ask for the name of the organization that will own their consolidation loans and the name of the organization that will service their consolidation-loan accounts. Borrowers then should investigate the experience of these organizations in administering student loans and the quality of the service that they provide.

Consider borrower benefits. Many consolidation lenders offer additional interest-rate reductions on Federal Consolidation loans. Borrowers typically qualify for these benefits if they permit their consolidation-loan payments to be deducted automatically from their bank accounts and if they have a long history of on-time payments. Borrowers should read the fine print of these benefit offers carefully. Typically, if a borrower is late on a single payment, the borrower loses the interest-rate reduction for the remainder of the repayment term.

Handle consolidation of Perkins loans with care. The Federal Perkins-loan program offers special interest-subsidy, deferment and loan-cancellation benefits that borrowers may lose by consolidating Perkins loans.

Know the plusses and minuses of consolidating during your grace period. Federal Stafford loans typically permit a six-month grace period following graduation during which no loan payments are required. In addition, the interest rate during the grace period on Federal Stafford loans issued since July 1995 is 0.6 percentage points lower than the rate for those loans in repayment. By consolidating during the grace period, borrowers can lock in a lower interest rate than they would receive by waiting to consolidate until their loans are in repayment. On the other hand, because Federal Consolidation loans offer no grace period, borrowers who consolidate during their grace period may lose the remainder of that grace period, unless they advise their lender to delay processing their consolidation loan until the end of their grace period.

Assess both your monthly payment amount and total interest costs. An additional benefit of loan consolidation is the opportunity to reduce a borrower’s monthly student-loan payments. If a borrower’s total education debt is $7,500 or more, the borrower may extend the repayment term beyond the standard 10 years—up to 30 years, if the borrower owes $60,000 or more in education loans. The downside is that by extending the repayment term, borrowers will pay interest—even at record-low rates—over a longer period. As a result, borrowers who extend their repayment terms can significantly increase the total interest costs of their loans.

USA Funds offers additional information regarding loan consolidation in its Web site at www.usafunds.org/borrowers/index.html, and through a free brochure, “Loan Consolidation—Is It the Right Option for You?” The brochure is available as a PDF file at www.usafunds.org/forms/DPDM131.pdf?ID=36.