Federal Student Loan Consolidation

There are two main types of college loan consolidation: federal and private. There are reasons to use both, but there are many downfalls to federal student loan consolidation. You need to learn the facts before rushing into anything.

Federal Student Loan Consolidation Interest Rates
The first downfall to federal student loan consolidation is the interest rate. In federal consolidation, your interest rate is based on an average of the interest rates currently charged on each of your original loans. This rate cannot exceed 8.5 percent, but that is a fixed rate. In other words, when the interest rates go down nationally, you will still be paying 8.5 percent.

You have much better chances of lowering your interest rate through private loan consolidation. Interest rates on these loans are based more on national trends and your personal credit history than on the rate you are currently paying. Especially if interest rates are low, you should consider private consolidation over federal. Keep in mind that you do need a good credit history to qualify.

Federal Student Loan Consolidation Limitations
Another downfall to federal student loan consolidation are the limitations put in place as to when you can consolidate. Federal standards state that you cannot consolidate using a federal consolidation if you are still a student. Only when your loans are already in default, deferment, or payable status can you consolidate using this method.

This is really not fair to the long-term student. It means that while you are still in school, interest is building on your unsubsidized loans that, according to the government, you can do nothing about. Private loan consolidation offers you the ability to lower interest rates and finance charges, saving you hundreds or thousands per year while you are still in school.

In the end, the reasons to apply for private over federal consolidation far outweigh the other choices for student debt. In fact, you will find that by avoiding federal student loan consolidation you increase your credit, save money, and better manage your student loan debt. Keep in mind, however, that every situation is different, and federal consolidation may be for you. As always, do your research before signing on the dotted line for either type of consolidation program.