How Student Loan Consolidation Works

Consolidation Eligibility

Jason Lewis, a student at Middle Tennessee University, picks up student loan information at the campus financial aid office in Murfreesboro, Tenn.
Jason Lewis, a student at Middle Tennessee University, picks up student loan information at the campus financial aid office in Murfreesboro, Tenn.
AP Photo/Mark Humphrey

Before considering student loan consolidation, either a traditional type or one of the new flavors, a person has to find out if they're eligible. If they are, they also have to be in the right time frame within the loan life to take advantage of consolidation. So, when exactly is that time?

Well, like the financial professionals say, it all depends. Loans, issuers, servicers and the various financial hangers-on all have different rules regarding consolidation and when it can happen and who it can be offered to. For example, Sallie Mae only offers grouping of certain loans to customers with more than $30,000 in debt. However, it can and does work with customers with less debt to help them accomplish something like consolidation, including helping them shift payments to a single date or working with lenders to extend payments. They're also developing new loan products to keep customers out of financial hot water. For instance, one requirement is the payment of interest on the loan begins when the student or customer enters school.

So when (and if) student loan consolidation is possible is something each customer needs to look into on an individual basis. But there are a few general tips to following when considering loan consolidation:

  • Loan consolidation is best considered when the loans begin coming due, generally six months after graduation, or within the same period of when a student stops attending school. This is also the point when the graduate has an opportunity to see what their financial future looks like and whether it would be better to stick with an agreed on 10-year payout, which offers the least amount of interest paid, or something that would reduce monthly payments but increase the overall cost of the loan.
  • Traditional consolidation was used more when student loan products were tied to the prime rate. If a student borrowed at 6.8 percent, and the prime dropped a year after he or she started paying, the student could apply for consolidation and the new loan would be tagged to the new interest rate, which was hopefully lower. Today, student loans are tied to a fixed rate rather than the variable prime. However, loans issued in 2010 are issued at a lower rate than those issued just a few years earlier and consolidation, if possible, could mean a lower rate.
  • Consolidation can take place any time during the life of the loan, but often the number of times a loan can be consolidated is limited. A change in financial circumstance can mean a needed change in the loan. The key is to keep an eye on how the loans fit into an individual's budget and how a consolidation may benefit the customer.

Overall, weighing your economic situation versus the terms of the loan is beneficial in looking at the times when you may not want to consolidate your loans. In the next section, we'll examine some of the downsides of consolidation, and why it's good to have that information on hand before making any decisions.