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Even though the low interest rate looks tempting, borrowers should examine several other factors before turning to consolidation. |
Features ... Savvy borrowers who want to permanently lower their interest rate may decide to consolidate their loans. Loan consolidation pays off eligible loans and creates a new loan with a fixed interest rate. The rate on the Consolidation Loan is based on the weighted average of all loans consolidated. Borrowers consolidating after July 1, 2001, may be eligible for an interest rate as low as 5.515 percent for the life of their Consolidation Loan. Sounds like a good deal, doesn't it? Well, maybe. Even though the low interest rate looks tempting, borrowers should examine several other factors before turning to consolidation. Immediate Repayment Consolidation Loans enter repayment immediately, and borrowers forfeit any remaining grace period on their loans. Jumping into repayment instead of taking advantage of a few months with no loan payments could create a financial strain, especially for recent graduates who are job hunting. Many borrowers will view the loss of the grace period as a small price to pay for a permanently low interest rate. A fixed interest rate of about 5.5 percent will mean less interest is paid on a year-to-year basis. Not An Easy Decision The decision seems deceptively simple - less interest per year and a lower payment amount. While these terms may provide relief to borrowers with big cash flow problems, other borrowers need to look at the bigger picture. Consolidation lowers monthly payments by extending the repayment term. Borrowers with large student loan debts could end up with repayment terms twice as long as their old loans. The longer it takes to pay off the loan, the more dollars go toward interest. Lower interest rates won't save borrowers any money if they double (or triple) the time to pay back the loan. Borrowers who don't consider all aspects of loan consolidation may find themselves unhappy with increased loan costs. There are ways to take advantage of the low interest rate and avoid hefty interest costs from extending repayment. Even with a Consolidation Loan, there's no penalty for early payoff. If borrowers follow the original repayment terms after getting the lower interest rate, they can save a bundle. Educate Borrowers In the coming months, the media and lenders will undoubtedly publicize the advantages of Consolidation Loans. Lured by the low interest rate and low monthly payments, short-sighted borrowers may think they'll save money by consolidating. The financial aid community can help borrowers look beyond the short-term advantages and take a long look at the consequences - immediate repayment and higher interest costs. Loan consolidation, like any refinancing option, should be carefully considered before borrowers sign away their old loan terms. Consulting the Comparison Chart Based on a debt of $30,000, the chart below illustrates how much more borrowers will pay for the extended repayment period with loan consolidation - over $5,000. The real winners are borrowers who pay off their Consolidation Loans early. These borrowers get the low interest rate and save over $5,000 by taking just ten years to pay off their loans. 
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