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Student Loans: What to Consider Before Consolidating

Kelsey Sheehy

College students relying on student loans to pay for college can easily graduate with 16 or more separate loans. Plan to borrow for graduate school, too? Add a few new loans, interest rates and bills to that list.

Each subsidized, unsubsidized, Perkins and PLUS loan borrowed each semester or quarter comes with its own interest rate and monthly statement.

[Learn about recent student loan interest rate changes.]

Keeping tabs on every loan and figuring out exactly what is due each month can be tricky. Consolidating those loans can eliminate some of the confusion, says financial aid expert Mark Kantrowitz, publisher of Edvisors.com.

"Consolidation can make it easier to repay student loans by streamlining repayment and replacing multiple loans with a single loan," Kantrowitz said via email.

This is not a one-size-fits-all solution, though, and experts suggest graduates consider four things before consolidating.

1. What you owe: Borrowers need to understand more than just their loan balance. They also need to know what type of loans they have. The National Student Loan Data System gives students a rundown of each federal loan by type and date disbursed.

Most borrowers have a mix of subsidized and unsubsidized Stafford loans. Interest rates on these varied over the years, so check with your loan servicer - the one who sends the statements each month - to find out the rate on each loan and whether it is fixed.

The interest rate on a consolidation loan is based on the average rate of all loans being consolidated. If borrowers combine low interest rate loans with those that have a higher rate, they could wind up paying more interest over time, says Deanne Loonin, director of the Student Loan Borrower Assistance program at the National Consumer Law Center.

"It plays out different ways for different people," Loonin says. "Some people, particularly if they have subsidized loans at different interest rates, their interest rate could go up if they put them all together."

Borrowers should also know whether their loans are through the federal government or a private lender such as Chase or Wells Fargo.

While private loans cannot be consolidated under a federal loan, private lenders may be more than happy to take over your federal loans. That doesn't make it a good idea, says Betsy Mayotte, director of compliance for American Student Assistance, a nonprofit that helps students manage college debt.

"Don't ever consolidate private loans with federal loans," Mayotte says. "Never."

2. Loan benefits: Some federal loans carry benefits that other don't.

Perkins loans, for example, carry forgiveness options not available on Stafford or PLUS loans.

Graduates can have up to 100 percent of a Perkins loan forgiven if they enter law enforcement, join the Peace Corps, are deployed with the military or become a science teacher, among other things. Consolidating a Perkins loan with another loan could eliminate that option.

Perkins, Stafford and Grad Plus loans offer income-based repayment options. Parent Direct PLUS loans do not. Combining a Parent Direct PLUS loan with another type of loan can eliminate some of those flexible repayment options, says Loonin with the National Consumer Law Center.

"If you combine your Parent PLUS loan with your other loans, it taints the entire loan," she says. "If you have a Parent PLUS loan, do some extra research and make sure you're not making things worse for yourself."

[Discover the perks and pitfalls of simplifying student loan repayment.]

On the flip side, consolidation could help borrowers gain access to forgiveness options such as the Public Service Loan Program, as well as the Pay-As-You-Earn repayment plan, notes Kantrowitz of Edvisors.com.

3. Simplifying doesn't guarantee savings: Consolidation can reduce what can be dozens of loans and payments to just one loan and one payment. But that shouldn't be the sole reason graduates combine their loans, says Mayotte of American Student Assistance.

"If that's the only reason and you're someone who can keep track, it's not the best solution," she says. "There are other ways to make it easier, such as automatic debit."

Borrowers who are struggling to make their payments could see immediate relief through consolidation, but they will still end up paying more, Mayotte says.

"It combines the debt and extends the term and therefore lowers the payment," she explains, adding that consolidation might be a smart move for students at risk of defaulting, but that it's not for everyone. "You end up paying a lot more in the long run."

[Discover 10 ways to save on college costs.]

4. Think short and long term: Recent graduates should not base their decision to consolidate solely on their current financial picture, Mayotte says. After all, for many graduates, it will improve over time.

If borrowers enter a profession where salaries typically start lower and then increase over time, income-based repayment might be the best option, she says.

However, if the inverse is true, then consolidation warrants a serious look. Graduates entering fields such as social work, where salaries don't increase significantly over time, may benefit from consolidation and an income-based repayment plan, she says.

Loan consolidation can also be a lifeline for borrowers in default, says Loonin, with the National Consumer Law Center. Graduates with delinquent loans may be told they need to bring their loans current in order to consolidate, but that isn't always the case, she adds.

"If it's that far gone, it's often a good strategy to get out of default," she says, but warns there is a lot of misinformation about prerequisites for the process. Students may not have to make payments first, she says, as long as they choose an income-based repayment plan.

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.

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