is good to consolidate my school loans?

Question

i have loans from federal perkins, is it true if you consolidate the loans you lose the grace periods? and is it possible in the future that the loan rate will go down?

Answer 1

There are pros and cons to any financial decision, and consolidation is no exception.

In general, consolidation is a good thing: borrowers who have variable rate loans often choose to consolidate because it enables them to "lock in" (e.g. fix) rates that will likely increase. Consolidation also allows borrowers to extend their repayment term beyond the standard 10-year repayment term that most students loans (Stafford and Perkins) begin with. (NOTE: you can usually extend your repayment term w/o consolidating -- just call your lender and request a "extended repayment" plan.)

Now, once you have consolidated, you won't be able to UNconsolidate so, yes, you would be out of luck if the rates decreased dramatically. While it is *possible* that rates will go down sometime during the 10+ years that you are in repayment, it is more likely that the next few years of your repayment period will be spent watching variable rates increase.

While no one can predict the future, it is very unlikely that Stafford/PLUS loan interest rates will ever reach the historic lows that they dropped to a few years ago. If you "hold off" on consolidating until rates decrease again, you might be waiting a while -- and these years spent waiting might negate the $$ you'll save by locking in that lower rate when it finally arrives. Moreover, if you *don't* consolidate and you decide to take your chances with the future market, keep in mind that the regulations governing Federal Consolidation Loans will probably also change in the future. There has been talk of making Consolidation loans *variable,* so the fixed-rate consolidation loan may not be an option if you hold off for a few years and later decide, "Hey, the rates aren't dropping like I had hoped."

You will lose your grace period if you choose to consolidate, yes. You do need to think long and hard about whether this is a loss that you are willing to endure. Financially speaking, you're looking at the difference between (a) being able to lock in a 4.75% interest rate on your Staffords or (b) watching the rates rise to 6.54%, then 7.14% then whatever the government decides to set them at for 2007-08). If you can handle losing your grace period, it's worth it to lock in that 4.75% (you might even be able to get a bit of an interest rate "break" depending on who you consolidate with).

NOW, although I almost always recommend consolidating Stafford Loans, your Perkins Loans are a separate issue. Perkins loans are FIXED-rate loans (they've been at 5% for *years* and there is no indication that this will change).

Perkins carry additional "benefits" with them that might be lost in a consolidation situation. For example, Perkins Loans can be cancelled in full if you enter one of several career fields (law enforcement, teaching, etc.). The interest on [unconsolidated] Perkins Loans is subsidized during any in-school/grace/deferment periods, so if you went back to school or applied for a economic hardship deferment later on, your interest would temporarily stop accuring. If you consolidate the loan, these cancellation benefits and interest subsidies would no longer exist.

Moreover, if you consolidate your Stafford loans *together* with your Perkins loans, the lender will calculate your interest rate by taking a "weighted average" of your loans' current rates, so your rate could be anywhere between 4.7% and 5%.

It's up to you if you want to consolidate Perkins. Perkins loans by themselves carry a "minimum" payment that you must pay. Naturally, if you consolidate it, the minimum doesn't apply, so usually by consolidating Perkins, you will be able to lower your overall monthly payment on the Consolidation Loan. So, if you want to leave Perkins out of the mix, be sure to ask yourself if you think you can handle the larger monthly payment.

Generally, when students ask me whether they should consolidate Perkins, I ask them
(a) how much debt do you have? a ton? is there a chance that your monthly payment will be more than you can handle? consolidating everything might be the only way to get your monthly payment down to a reasonable amount
(b) do you qualify for loan cancellation? Check here: http://www.finaid.org/loans/forgiveness.phtml . If you do, don't consolidate your Perkins
(c) are you planning on returning to school anytime soon? If so, you might want to leave out your Perkins so that it will be subsidized while you are in school.

I would encourage you to read up oon consolidation a little bit: http://www.finaid.org/loans/consolidation.phtml . If you do choose to consolidate, act fast -- you must submit your application *before* July 1st in order to get the current 4.7% rate.

NOTE: The person above me is uninformed. Rates did not increase today (they are reset every July 1st and, this time, are set to increase). Some -- but not all -- school loans are subsidized, but ONLY as long as you are in school or in a grace/deferment period. Essentially, once you enter repayment, all of your loans become "unsubsidized." Unlike with Perkins, if you consolidate your Subsidized Stafford loans, they *retain* their interest subsidy any time you enter deferment, go back to school, etc. So, when consolidating Staffords, you have nothing to lose as far as subsidies go.

Just do some reasearch, make sure you're getting a FEDERAL Consolidation Loan from a reputable company, and you'll be fine. :-) Good luck.

Answer 2

No way. If you consolidate you will get a loan with a much higher interest rate. School loans are goverments subsidised and you receive a much lower rate. Futhermore the payments are more manageable and with a bank or lender loan you may get more than you can handle. You will lose your grace and the rate will not go down. In fact only go higher. For example rates increased just today!!