Student loans are in a class by themselves. This is because they are guaranteed by the government, and provided for by federal programs. Since these loans operate differently than normal loans, the consolidation processes are a little different also. These differences appear in the types of loans that can be consolidated, the grace periods allowed on these loans, and how interest rates are determined.
First of all, there are only three types of loans that can be consolidated through the student loan consolidation program. These loans are: Stafford loans, PLUS loans, and Federal Perkins loans. Each of these loans has its own rules and regulations that the students operate under in order to qualify, and these differences are all taken into consideration during the student consolidation process. Students are not allowed to consolidate personal or general debt that are not a part of their student loans.
Of the student loans available, several of them operate with grace periods and special forgiveness rules that are not standard on other loans. Through the process of consolidation, these extras are not carried over. This means that you will be expected to pay on time and in full without any allowances.
Interest rates for student consolidation loans are determined differently than rates for general loans. Normally, consolidation loans will be determined based upon your credit score. However, student consolidation loans are determined by the mean of all of your student loans, adjusted depending on how much each loan is worth, and then rounded to the nearest .125%. The highest interest rate that can be charged for a student consolidation loan is 8.25%. In 1998 the Federal Loan Consolidation Program elected to change all student loan consolidations to fixed interest rates, instead of the variable interest rates available on other types of loans. This is also something to consider when you are thinking about consolidating your student loans.
Since student loans are guaranteed by the government, they are handled by one of two federal programs: the Federal Direct Student Loan Program, and the Federal Family Education Loan Program. These two programs work together to provide student loan services to anyone in need, but only the Federal Direct Student Loan Program is responsible for consolidating student loans.
When considering a student consolidation loan, it is very important to review all of your current student loans first. Because of the way interest rates are determined on student consolidation loans, you may be safer keeping multiple loans instead of just one. On the other hand, if consolidation will give you a lower interest rate, it is a good idea to consolidate. Not to mention the fact that consolidating your student loans will stretch out the payments for ten to thirty years, which means much lower payments than a normal student loan. However, if you choose to draw out your payments for multiple years, the amount you are paying in interest will be larger than if you paid off your debt sooner. Make sure to consider what allowances you will be losing and what interest rates you will be dealing with when you are deciding to consolidate student loans.