Money Matters

Though July 1 was the federal deadline to lock in historically low student loan interest rates--and rates have nearly doubled since--consolidating your federal student loans still might help you better manage your student loan debt.

Here are some answers financial experts offer to commonly asked questions about consolidating loans.

What is loan consolidation? When you consolidate your student loans, you combine your multiple loans by taking out one new loan--with an interest rate that remains fixed for the life of the new loan. The advantage to consolidation is that your rates won't fluctuate from year to year, says personal finance expert Jordan E. Goodman, author of "Everyone's Money Book" (Dearborn Financial Publishing, 2003), which includes information on student loans. And with rates at their fourth lowest, you can still lock in a low interest rate for the duration of the loan.

Here's how consolidation works: The lender will determine your new interest rate by the weighted average of the interest rates on the loans you are consolidating. The lender then rounds that figure up to the nearest one-eighth of a percent, according to the Department of Education. The Department of Education ensures the new interest rate is no higher than 8.25 percent.

For example, if you consolidate one Stafford loan--the most common kind of student loan--with a 4.7 percent interest rate and one Perkins loan with a 5 percent rate, your averaged 4.85 percent rate would then be rounded up to the nearest one-eighth percent--to about a 4.875 percent fixed interest rate.

Also, borrowers can further reduce their monthly payments by extending the term of the loan, Goodman says.

"The advantages to consolidating your loans is that you will be able to lock in a lower interest rate...and you'll have one bill to pay rather than several," Goodman says.

Are there any disadvantages? If you extend the term of the loan, consolidation could potentially double or triple your total interest expenses, financial experts say. Borrowers usually repay unconsolidated student loans over 10 years, but consolidated loan repayment can be stretched up to 30 years, experts note.

To counter the snowballing interest and shorten the life of the loan, financial experts suggest borrowers make higher payments when possible.

Another potential caveat: Federal law allows students to consolidate their student loans and lock in a fixed interest rate only once, Goodman says. The rates can rise or drop every July. On July 1, 2005, the interest rate jumped from 2.77 percent to 4.7 percent for Stafford loans. If interest rates drop after you consolidate, you can't take advantage of it.

"Unfortunately, you can't be a serial consolidator," Goodman says.

Also, keep in mind that you must begin repaying a consolidated loan within 60 days of the loan's issue unless you qualify for a deferment or forbearance, says Erin Korsvall, spokeswoman for Sallie Mae, the largest U.S. provider and consolidator of student loans.

How do I consolidate a loan? To get started, you'll need to have information about your outstanding loans and their interest rates, Korsvall says. If you don't have those records, access them using the National Student Loan Data System at www.nslds.ed.gov.

If you have all your loans with a single lender, you must consolidate with them unless they don't have a consolidation program, Korsvall says. If multiple lenders hold your loans, you can shop around.

Look for a lender who can offer you competitive borrower benefits, such as an interest rate reduction for making a certain number of on-time payments, Korsvall notes. For example, Sallie Mae offers a 1 percent interest rate reduction if the borrower makes 36 initial on-time payments and a 0.25 percent rate reduction for signing up for automatic debit payments.

"It's a long-term relationship when you consolidate your loan," Korsvall says. "You want to make sure you pick a lender that is reputable and offers a variety of services, like online account service."

Are all loans eligible? You can only consolidate federal loans, such as Stafford or Perkins loans. You cannot consolidate private loans you've received from credit unions, banks, savings and loans associations or those issued by colleges. And, oddly, you can consolidate a single loan. For a list of eligible loans, visit www.federalconsolidation.org/eligible.htm.

What's the best time to consolidate? The best time to consolidate might be when your student loans are in their grace period--the six-month period after you graduate in which you do not have to make loan payments, Korsvall says. That's because interest rates are slightly lower during grace periods, and once you enter repayment, your rates usually increase by 0.6 percent.

Can I consolidate while I'm still in school? Students can consolidate their loans. When they do so, lenders put their loans into repayment status to make them eligible, Korsvall explains. As long as they are in school, students can defer their loans. But, they have to begin making payments toward their student loans as soon as they graduate--in effect, forfeiting their six-month grace period after graduation, Korsvall says.

While borrowers cannot reconsolidate loans, they can consolidate an existing consolidated loan with new Stafford loans, Korsvall notes.

Will consolidation affect my repayment plan? You still will be able to choose from a variety of repayment options, including standard repayment, in which equal payments are due each month, and graduated repayment, in which payments start low and gradually increase, Korsvall says.

To determine the best repayment option for you, try the loan payment calculator at www.finaid.org/calculators/loanpayments.html.

Where can I learn more? Ask your financial aid office for guidance on consolidation. You might also check out such Web sites as www.finaid.org or www.studentaid.ed.gov.

"Consolidation is not the best option for everyone," Korsvall says, "so get expert advice before you consolidate."