December 13, 2007


The end of the semester is always a useful time to remind people about options for consolidating federal student loans. A few starting points (general do’s and don’ts):

- You CANNOT consolidate until you graduate.
- If you consolidated in the past to take advantage of lower rates (good for you!), you CAN [and want to] reconsolidate assuming you have borrowed something since then.
- You CAN consolidate wherever you want – you are not required to use your lender even if they are your only lending source.
- NEVER consolidate federal loans with private loans (for those with private loans, I have a link in the resource section to provide information about refinancing them).
- ALWAYS shop around for the program that will best meet your needs.

The most commonly asked question is always where to do it. Keep in mind that as long as you are doing a federal consolidation loan (which is the only thing you should do), the only difference between the products are (1) who you are paying each month; and (2) the financial benefits the companies offer [or don’t offer]. Everything else about the loans (eligibility for deferment, etc.) are identical, the lender chosen won’t offer anything better than another. Those two items listed are the only real differences with one ‘new’ (as of October 1, 2007) exception which I’ll outline later.

For the vast majority of people, item one (who you pay) is obviously not a real big deal – whether I make my payment to Sallie Mae, MOHELA, Dept of Ed, Citibank, or anyone else doesn’t matter. The second item (financial difference in benefits offered) is really the primary criteria that should be used in evaluating loan consolidation offers. How you look at the products is based upon how you intend to repay your loans.

If you plan to repay your debts quickly (2 years or less).
Find the program that offers the largest “up front” (principal balance) credit. Key Bank
used to offer a 5% principal balance credit; I’ve been told this is still available, but it is not listed on their website, so you’ll want to do some homework. I’ve never seen a principal balance credit larger than this.

If you plan to repay your debts over time (graduated/extended).
If paying over time, an upfront benefit will be much less meaningful than a reduction in your interest rate. There are two states that currently offer the most substantial interest rate incentives. New Hampshire (which is open to anyone)
offers a .5% reduction for auto payment, an additional 1% reduction when repayment begins, and a $250 principal balance reduction after 12 consecutive on-time payments (so the total rate benefit is 1.5%, given on day one). North Carolina offers a slightly larger benefit (2.25%), but the benefit is provided in a tiered fashion over time (.25% reduction for paying automatically; .5% additional interest rate reduction after 24 on-time payments, .5% additional after 12 more months (36 total), and 1% more after 12 more months (48 total) – 2.25% total rate reduction after 4 years). Obviously if I’m planning on repaying my debt in ~5 years, a program like New Hampshire where that benefit is immediate would serve me better than a principal balance credit and will also serve me better than a program like North Carolina where I have to wait 4 years to fully realize the benefit. North Carolina is going to best serve those intending to utilize an extended repayment (12+ years) option. North Carolina does require people to have a “state connection” in order to utilize their program. The easiest way to create that connection is to open up a 529 college savings plan for a child, sibling, niece/nephew – you can do so online in about 5 minutes with as little as $25. Once that is opened, you then have your connection and are eligible for their State Consolidation program.

I mentioned above that there is one exception where I would not consolidate with a company offering the best financial incentives – that case would exist if I am being hired [and plan to continue working] as a “public service” professional. The best working definition I’ve seen is at (is still being crafted). If I fit this definition, then I am the “potential” exception. An example of who this new program would serve is a student that just completed a graduate program in a field like social work; has a high level of student loan debt working in a field where their salary will never likely dramatically increase over time. This is the prime person for this program. How it works: Consolidate with the Department of Education (ONLY scenario where consolidating with the Dept of Ed will make financial sense) and select the income sensitive repayment. After 10 years of payment, the remaining balance will then be forgiven [you’ll be responsible for taxes on the forgiven amount, but the remaining loan amount will be wiped away]. This scenario is ONLY available if you use the income sensitive repayment option and ONLY if you consolidate through the Dept of Education. Even if I am a public service employee, if my debt level will not require me to repay my debt over more than a 10 year period, I will be better served by one of the other programs previously outlined!

Additional Resources.
Accessing your Federal Loan Info

OFS Consolidation Resources (Weighted interest rate calculator, repayment plan information, payment calculator, and other resources)

Private Loan Consolidation (READ PRIOR TO DOING – often not smart)