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Reducing Debt by Consolidating Student Loans with Low Interest Rate Options

written by: •edited by: Donna Cosmato•updated: 4/14/2012

Are you in student loan debt and are struggling to make your payments? Consider consolidating student loans with low interest rate options. This means keeping money in your pocket every month. Read about consolidation loans for private and federal loans in addition to how to choose.

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    Types Of Student Loans

    USCurrency Federal Reserve 

    Currently, there are many types of loans that college students can apply for. Student loans come in the form of private loans given by banks and other types of financial institutions, while other loans may be given by the Federal government.

    Some student loans, called Direct and Stafford Loans, are low-interest, based on a financial need and have long repayment periods. These loans can be subsidized, meaning that the government pays part of the loan’s interest, while the student is in school or during a deferment requested by the student. Alternately, some loans may be unsubsidized, meaning that the loan’s interest is paid by the student. Unsubsidized loans are generally not based on a financial need but do have low interest rates with long repayments.

    Other loans that are unsubsidized are PLUS loans, which can be applied for by the parents of undergraduate college students. PLUS loans are low interest, based on credit history, and have shorter repayment periods of approximately 60 to 90 days after full- or half-time school attendance ends. Furthermore, there are limited PERKINS loans, which are given by the government in cases of extreme financial need. These loans are typically smaller, have low interest rates, and have a short repayment period such as 90 days after the student attends less than half-time enrollment or graduates from the school.

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    When Should You Consider Consolidating

    Technically, consolidating student loans with low interest rate options can be done right after graduation or after the grace period (usually six months) ends. For most loans, you are notified by mail, e-mail, or coupon booklet that your repayment period has begun. Consider consolidating if 1) you are struggling with payments, 2) there are too many loans to repay or 3) you want lower interest rates.

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    The Process of Consolidating

    When students are ready to repay loans, they may choose to consolidate their existing student loans. Consolidating loans involves applying for an “umbrella" loan amount with a low interest rate that is used to repay the existing loans. The first step in consolidating loans is to gather all the existing loan final documentation. The final documentation for the loan will contain the total amount due plus interest and the terms for repaying the loans. Using this paperwork, calculate the total amount due (balance and interest) from all student loans.

    The type of student loans you have will most likely determine the type of consolidation loan you obtain. One important tip: Private and federal student loans cannot be consolidated together. Federal loans have low interest rates with more benefits in consolidation than private ones do. For instance, federal loan consolidation programs may not require current employment, collateral or a cosigner, while private loan consolidation programs typically require at least enough collateral to cover the amount borrowed.

    There are several web sites on the Internet that can assist you in consolidating student loans with low interest rates. For private loans, try FinAid’s page on private loan consolidation programs. Keep in mind that for private loan consolidation, you are replacing one private loan with another one that has a lower interest rate. There are home equity loans, personal loans and education loans that can be used to do this. For federal loans, there are a variety of options for consolidating the different types of loans owed.

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    Points to Remember

    Consolidating loans is the process of obtaining a lower-interest loan, which covers the amount of debt owed from one or more loans. To consolidate successfully, first gather all loan paperwork and calculate your student loan(s) and how much is owed. Next, determine research options and determine which consolidation would work. Consider the following factors when looking for loan consolidating options –

    - Lowest Interest rate (fixed, variable)

    - Estimation of payments

    - Loan origination fees due

    - Available grace periods for repayments

    - Requirements for applying for the loan (cosigners, collateral)

    Finally, apply for the consolidation loan and wait for the loan’s approval paperwork. The existing loans will be taken over by the new loan institution and the repayment plan for the consolidated loan will be sent to you.

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    References

    DebtHelp – Student Loan Consolidation – http://www.debthelp.com

    Federal Loan Consolidation Program - http://www.studentaid.ed.gov/PORTALSWebApp/students/english/consolidation.jsp

    Student Loan Consolidator - http://www.studentloanconsolidator.com/consolidation/

    (Photo courtesy of WikiMedia Commons – http://commons.wikimedia.org)