The Broke Yuppie

By wsssst, via Flickr

The student-loan bills keep rolling in. Week after week, month after month, loan after loan - they seem endless.

I accumulated nine separate student loans during my academic career, and many of them are on different billing schedules with different monthly payments and different interest rates. I owe money on at least one of them almost every week.

It gets confusing, my billing cycle. If only there were an easier way.

Lucky for me, there is an easier way. It’s called a consolidation loan, and here’s how it works:

Either the federal government or a private lender will take all your loans (or at least all your federal loans), average their interest rates and combine them into a single loan with a single monthly payment. You’ll usually have more years to repay your loan - meaning lower payments - and, if you have variable-rate federal loans (these existed before 2006), you’ll lock in an interest rate until you’ve paid off your debt.

Sounds brilliant, right? I’d say it’s pretty great.

But wait! There are caveats to consider before applying for such a loan:

You may end up paying more in the long run. If you’re on a 10-year repayment plan, even though your monthly payments will be higher, you’ll accumulate less interest over the lifetime of the loan. If you consolidate and enter, for example, a 25-year repayment plan, you’ll likely pay thousands of dollars more in interest during those extra 15 years. So if you can afford your current payments, consolidating, although convenient, may not be the best option.
You could lose the discounts offered by your current lender. If, say, your lender offers an interest-rate reduction after two years of on-time payments, consolidating before the two years are up would get void that discount.
If you consolidate federal loans with a private lender, you will lose some options offered by the federal government. You will not be able to defer, forbear or cancel your loans, and the alternative repayment plans will become unavailable to you. So if you do choose to consolidate, first try to get a federal consolidation loan.

Speaking of federal vs. private consolidation loans, I should probably tell you how to get a consolidation loan. A lot of private lenders have stopped giving them, and because of the perks associated with federal consolidation loans, I’d suggest starting with the federal government’s Direct Consolidation Loan. Application processing is on hold until July 1, when some rules governing student loans will change and a new (and amazing) repayment plan will be introduced. That shouldn’t stop you from applying - just know you won’t be processed until next month.

Note: If you are applying at a website that is not administered by the Department of Education (i.e. one that does not have ed.gov in its url), you are applying for a private consolidation loan. Just FYI, because this stuff is confusing.

To qualify, you must have at least one FFEL loan. I think that’s the only standard you must meet. Private loans, such as those from Sallie Mae and similar lenders, cannot be consolidated under a Direct Consolidation Loan.

Before applying (you can apply online here), gather information about all your loans, including the loans you will not be consolidating, and if you don’t already have one, apply for a PIN from the Department of Education’s loan-servicing site.

Once you have this information, visit the Department of Education’s consolidation application site.

While applying, you’ll have the option to choose one of the various repayment plans offered by the federal government. That’s the part where you’ll breathe a huge sigh of relief when you see that your monthly payments will drop from $687 to $260. I mean, when I saw mine would do that. Phew. Big sigh. I’ll be able to eat!

I’ll have more information on the various options in upcoming posts.

Give yourself about an hour to complete the entire application process - less time if you have fewer loans, and maybe more if you have a lot of loans. I just completed the process - I decided the benefits far outweigh the costs (seeing as the costs, for me, involve being unable to afford to feed myself).

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