However, debt consolidation is sometimes a tradeoff, an exchange of easier payment terms for a more expensive loan, since you may pay more interest on the same sum over a longer period of time. The ideal consolidation loan would be one in which you took advantage of a financial trend to secure a lower interest rate, or were able to do so because of your excellent payment history, without extending the term of any existing loan.
However, if your choice lies between consolidating existing loans while paying more interest over time and falling behind in your individual loan payments, you should take the consolidation loan. As you see, deciding whether consolidation is the right course for you depends not only on your current situation but also on the terms of the new loan. If you have both federal and private student loans, you will have to consolidate those types of loans separately.
Department of Education USDOE has established a well-documented system of rules for federal student loan consolidation, and each private lender has its own guidelines for acceptable consolidation plans.
To guide you in making a decision about student loan consolidation, you can try a simple online assistant introduced by USDOE in the middle of to help students understand the basic principles of personal finance and apply that knowledge to their management of their student loans.
The assistant is called the Financial Awareness Counseling Tool FACT , and it consists of a series of tutorials based on information from your own government loans, using that information to create a personalized analysis of your financial situation and offer appropriate advice. A Possible Alternative The government has a strong interest in making it possible for students to pay off their educational loans, and at the end of it instituted a new form of the income-based repayment plan called Pay As You Earn PAYE.
PAYE is designed to lower your monthly student loan payments, and thus you must have a partial financial hardship to qualify for the plan. The government defines the needed partial financial hardship as the condition existing when the monthly payment amount you would be paying under the Standard Repayment Plan exceeds the amount you would pay every month under PAYE.
That is a circular definition, but nevertheless a clear one after the two amounts are calculated and compared. There are other requirements discussed on the linked page you must qualify as a new borrower beginning in , not all Direct loans can be repaid under PAYE , but there is one outstanding benefit: The federal government has set up a website to organize its Direct Loans consolidation information in one place.
Here is an outline of the eligibility requirements for a Direct Consolidation Loan: You must have one Direct Loan or Federal Family Education Loan, at minimum, falling into one of these four status categories: You can sometimes consolidate loans in default if you have either arranged an adequate repayment schedule for each or intend to repay your Direct Consolidation Loan by way of Income Contingent Repayment or Income-Based Repayment definitions listed here.
You must have failed to secure an FFEL consolidation loan, secured one that does not offer a repayment plan tailored to your income, or have plans to submit your debt to the Public Service Loan Forgiveness Program. Once the question of your eligibility has been settled, you can apply for a Direct Consolidation Loan in one of three ways: You can choose a fixed or variable rate, unlike federal consolidation which is fixed rate only , and your repayment schedule begins immediately.
There are two discounts for which you may qualify, one for authorizing automatic payment from a checking or savings account and another for existing Wells Fargo customers called the relationship discount.
Other Places to Find Information About Consolidation Your student loan lender can provide a free consultation and will already have detailed knowledge of your finances, which will be particularly helpful.
The New York Times online has posted a wealth of information on all aspects of college, including a guide to different ways of managing student loan debt.
For example, the guide briefly discusses how to work loan forgiveness into your consolidation plan, which presents an interesting avenue for erasing debt.