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Debt Consolidation for Students

Many of you who have federal loans (Stafford and PLUS) may have been thinking about consolidating them once you graduate.  Consolidation Loans combine several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. Consolidation loans are available for most federal loans, including FFELP (Stafford, PLUS and SLS), FISL, Perkins, Health Professional Student Loans, NSL, HEAL. 

The cost of consolidating:  The interest rate on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25%.  As of July 1, 2006 interest rates for Stafford Loans were fixed at 6.8% and for PLUS loans at 8.5%.    Loans taken out before July 1, 2006 have variable interest rates.

If you have taken out all your federal loans after July 1, 2006, then your interest rate is fixed.  The cost of consolidating for a fixed rate Stafford Loan would make the interest rate approximately 6.875%.  For a PLUS loan, however, the interest rate could go down to 8.25%.  Double check that interest rate with your lender before consolidating.

In order to consolidate, the loans must be in repayment status or grace status.  Loans in an in-school status may not be consolidated.  Loans must also be less than 270 days past due on the date the FFELP Consolidation Loan is scheduled to disburse.  

Advantages of Consolidation loans

  • loans are locked in a fixed interest rate
  • the loans are with a single lender
  • lower, more manageable monthly payment (due to extended repayment period)
  • single monthly payment (if you have four different Stafford Loans, you may get 4 different monthly bills.  Some lenders will combine all Stafford Loans into one payment, however, you should check with your lender about this)

Disadvantages of Consolidation loans

  • longer repayment period
  • greater interest paid over the life of the loan
  • interest rate may be slightly higher
  • possibility of limited deferment/forbearance options
  • may lose current loan forgiveness benefits
  • may lose current loan incentives
  • student and parent loans may not be combined together into a single consolidation loan.  Student loans may be consolidated and Parent loans may be consolidated, but they may not be consolidated together.

Unfortunately, due to the Higher Education Rehabilitation Act, the lender incentives on consolidation loans have been cut making such loans unprofitable.  Many FFELP lenders will no longer make consolidation loans.  If FFELP lenders will no longer make consolidation loans, the Federal government still will.  You can contact the Federal Direct Consolidation Loan people at  Due to the increased volume of people who will need to make consolidation loans with the federal government, there may be a delay in getting in contact with the federal consolidation loan people.  You should keep trying.

It is suggested that borrowers who have variable interest rate Stafford and PLUS loans should wait until July 1, 2008 to consolidate their loans as interest rates are expected to drop by at least 3% as compared to current rates.  Borrowers who do not have variable rate Stafford and PLUS loans may want to consider alternatives to consolidation, since they will not receive any interest rate benefits through consolidation.  

For more information on Consolidation and other types of loans, you may go to, speak with your lender(s), or stop by the Financial Aid Office.

Managing Debt

Your FICO Score: A FICO score is a three digit number based on your spending and bill-paying habits and your overall debt load.  Scores range from 850 down to 500, the higher the score, the better.  Your goal should be to have a score of over 720, which will get you the best possible interest rates on credit cards, car loans, and home mortgages. 

How do I find out my FICO score? The three major credit bureaus are Equifax, Experian, and TransUnion.  All three may have slightly different scores and you should check all three as each bureau may have different information reported to them.  You can check your credit once a year for FREE.  Go to to get your reports.  You need to know your score so that you can work to improve it if need be.

How do I improve my FICO score?

  • Pay your bills on time.  This accounts for 35% of your overall score.  Make your goal to write the check and mail it or submit the bill online at least 5 days prior to the due date. You can even set many of your bills to automatically be taken out of your checking account each month for you.  Just make sure you have the money in the account to avoid fees.
  • Manage your debt-to-credit-limit ratio. Your debt is the combined balances on all your various credit cards and installment loans, the sum of all your owe.  Your credit limit is the combined total of the maximum amount each credit card company is willing to let you charge.  This ratio affects 30% of your score.  You want to decrease the debt and increase your credit limit.
  • Protect your credit history. The longer your history, the better.  Keep credit cards that you have had for a long period of time.  The history is to your benefit and counts for 15% of your score.
  • Create the right credit mix. The final 20% of your score is split between new credit activity and your general mix of credit(credit cards, retail cards, and installment loans).  Don’t apply for a lot of new cards all at once and don’t close a bunch all at once either.
  • Correct mistakes. When you run your report, if you see errors, fix them.  Don’t let incorrect items affect you negatively.

Credit Cards: What you need to know. 

  • First things first, avoid credit card use which you will not pay back fully at each billing cycle.  Credit cards should only be used for emergencies, not to pay for a luxury trip or other fun splurges you can’t afford.  
  • Pay attention to the credit cards you have or sign up for. Check to make sure there is no annual fee.  Look in to the interest rate on the card.  Look around at different companies to see if there may be a better interest rate out there.  But remember, that closing long held accounts can hurt your FICO score.  
  • Pay off the amount you charge as soon as possible.  Paying the minimum will barely pay down the amount you owe since you are being charged so much interest.  Pay above the minimum or the full amount whenever possible.
  • Look for mistakes.  Accidents happen, make sure to catch them.
  • Pay your bills on time!

Student Debt Overview: When you graduate, you should be in touch with someone from the financial aid office or your lender to figure out the actions steps on your loans.  Most loans offer a 6 month grace period before you must start paying off the loans.  Deferment (meaning you wait to pay back your loans until a later date) can be an option if you qualify: you become disabled, are unemployed, go back to school, join the Peace Corps, or sometimes if you work with disadvantaged children.  Otherwise it is time to start paying off your loans.  Ideally, your goal is get your debt paid off as quickly as possible.  The longer you take, the more interest you will pay.  Aim to always pay on time, not just to help your credit score, but many loan companies will reduce your interest rate after a period of on time payments. Student loans will follow you wherever you go, so build these payments into your budget and start paying them off.

Information for this sheet was pulled from The Money Book for the Young Fabulous & Broke by Suze Orman.  While this book was written a couple of years ago, you may find it helpful as it goes into much greater detail on many financial subjects aimed at the troubles recent graduates might face.

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