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What To Look For When Consolidating Student Loans

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When I graduated college, I had around four or five student loans (a mix of Stafford and Perkins loans) with as many lenders and was sending off checks each month to all of them. It was a headache… so when I heard that I could consolidate (through the billions of junk mailings the consolidators sent me), I jumped at the opportunity. In analyzing a bunch of student loan consolidation lenders, I came to one conclusion: it’s all about the rate discounts.

For me, my loans were all government backed student loans with very specific interest rates. I don’t know if this is different for students with private loans (non-government backed loans like Stafford and Perkins) but when it comes to consolidating the government backed loans I had, they just averaged the rates and the dollar amounts and treated it as one big chunk.

So, if I had $10,000 at 3% and $10,000 at 4%, my consolidated loan was for $20,000 at 3.5%. Every lender I talked to gave me the same exact information, I was going to have a loan for $20,000 at 3.5%; there was absolutely no difference and no negotiating that. The difference was in the rate discounts and they came in three forms:

  • rate discounts for auto-debit,
  • rate discounts for on-time payments,
  • rate discounts for consolidating within your grace period.

Auto-Debit Discount is usually a quarter of a percent off your interest rate (or something around that) if you set an auto-debit from your bank account. On-time payment history is another great interest rate reducer, also around a quarter of a percent, and that’s usually after a year or so of on-time payments. The lender is looking to collect money and reduce headaches, so they offer these discounts. Lastly, if you’re willing to consolidate within your grace period, you can expect something on the order of half of a percent discount.

There you go, that’s what I found when I looked into consolidating my student loans.

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4 Responses to “What To Look For When Consolidating Student Loans”

  1. Dustin says:

    Non government loans are different. For these, I went through a credit process and was given the ‘rate of the day’. From there, the normal direct withdrawal discounts and all those others may still apply, based on the bank.

    Also a discount which you did not list is a loan from the bank you have your checking account. If you go with them most often (I have read/heard/experienced) will give you a comparable rate plus an additional quarter point off of your direct withdrawal discount.

    Thanks jim.

  2. Christina says:

    Just like securing student loans in the first place, consider that a very small percentage of people will actually qualify for the benefit for on-time payments, depending on the loan company. Some will disqualify you from any rate discounts if you are late with just one payment, and usually they take quite a few payments to kick in in the first place. Some lenders, like Total Higher Education, have more forgiving policies in this regard.
    Auto-debit discounts are usually better, if you know you’ll always have enough money in the bank.
    Also look at when the lender will capitalize/recapitalize your loan – that can make a huge difference in how much you’ll have to pay off.

  3. Jason says:

    This is good to know. I will be in your shoes soon, about a year. I, however, will have lots of private debt. But from what I have seen it is more or less the same, but they have a max cap on the average depending on your credit.

    Based on what you say, it may be more worth while to consolidate the federal loans, and consolidate the private loans separately. I would have to make two payments, but I think I would be saving in the end. I’ll have to run the numbers.

    • Steph says:

      Government loans & private loans cannot be consolidated together. However, I’m wondering if it’s worth consolidating the subsidized and unsubsidized loans separately in case of financial hardship. That way, the interest on the unsubsidized loan would be paid while in deferment. But maybe this is the only way they consolidate Federal loans. Food for thought…


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