This column continues the discussion of consolidating student loans. You can find past columns at www.ext.colostate.edu/pubs/columnym/ymmenu.html.
Students who have student loans in the federal Direct Consolidation Loan Program and students using the Federal Family Education Loan, or FFEL, program administered by the Colorado Student Loan Program are eligible to consolidate their student loans.
Student consolidation loans should be compared in the same way you would shop for a car loan or a house loan. Compare costs, fees, interest rates and total interest to be paid for the entire length of the loan.
Students who have Direct Loans and are still in school and students with FFEL loans who are in a grace period can consolidate their loans with a potentially lower interest rate. The rate can be as much as .6 percent lower than their current rate. For all other borrowers, the interest rate on consolidated loans is the weighted average of all loans being consolidated, rounded up to the nearest 1/8 of 1 percent (not to exceed 8.25 percent).
Compare federal and state consolidation programs if you are eligible for both. Direct Consolidation Loans do not charge fees. FFEL lenders may include fees in the consolidation process.
Repayment benefits may differ between federal and state loans and between FFEL lenders. Check on all repayment benefits; for example, borrowers using an electronic debit account may receive a discount on their interest rate. Some lenders offer an interest reduction for making a certain number of on-time monthly payments.
The four repayment plan options for consolidation programs are the same as for original loans: Standard Repayment Plan with fixed payments and a fixed interest rate (usually the least costly over the lifetime of the loan); Graduated Repayment Plan (payments increase as salary increases); Income-Sensitive Repayment Plan (payments may go up or down for up to 25 years); and the Extended Repayment Plan (12 to 30 years).
Consider the following when making a decision about consolidating student loans:
– In- and out-of-school borrowers are cautioned against consolidating if they have loans that might be forgiven or have other discounts or subsidies that will be forfeited if the loans are consolidated.
– Before November 2002, both spouses were responsible for the total amount owed on a Joint Direct Consolidation Loan. A new law now discharges the amount of the loan attributed to a spouse who dies or transfers the balance if one spouse is totally and permanently disabled. Both spouses are still responsible for the consolidated loan if they are divorced or separated. Some advisers recommend that married couples consolidate student loans separately.
For more information about the federal Direct Consolidation Loan Program, see http://loanconsolidation.ed.gov/borrower/bapply.shtml. Check the Colorado Student Loan Program Web site at www.cslp.org.