Many individuals turn to student loans to help finance the steep costs of attending colleges or universities. Like all loans, students must pay pack student loans with interest, typically after graduating from college. A student consolidation loan is a bank loan that allows an individual to pay off the balances of his student loans. An individual must then pay off the single consolidation loan, rather than make multiple student loan payments.
Can You Consolidate?
While at one time students could consolidate student loans while they were in school, the Higher Education Reconciliation Act of 2005 banned the practice, meaning students may not consolidate loans until they graduate or leave school and enter the official repayment period. However, parents of college students with federal PLUS loans may consolidate their loans at any time, including while their child is still enrolled in higher education.
Background on Consolidation Loans
While students currently enrolled in college are not allowed to consolidate their student loans, this does not impact the total amount they must repay. This is because a consolidation loan is not a money-saving tool, but only allows an individual the convenience of making payments on one bill to a single company.
Costs of Consolidation
Far from being a money-saving tool, former students actually pay a higher cost for the convenience of consolidating their student loans. A consolidation loan is more expensive because it uses a weighted average of all of an individual's student loan interest rates, then tacks on a surcharge, rounding up the average interest rate by one-eighth of a percent. According to an article from FinAid, a collegiate loan and financing informational website, individuals end up paying a small amount more over the life of consolidated loans than they would making separate student loan payments.
Alternatives
Although consolidation is not an option, students wishing to save money on their loans while they are still in college can make interest payments before they graduate and their loans enter the repayment period. Making such payments while in college prevents interest from being "capitalized," or added to the principal balance of the loan. This cuts down the total amount students must repay, potentially saving them thousands of dollars.
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