Consolidation loans often reduce the size of the monthly payment by extending the term of the loan beyond the 10-year repayment plan that is standard with federal loans. Depending on the loan amount, the term of the loan can be extended from 12 to 30 years. (10 years for less than $7,500; 12 years for $7,500 to $10,000; 15 years for $10,000 to $20,000; 20 years for $20,000 to $40,000; 25 years for $40,000 to $60,000; and 30 years for $60,000 and above.) The reduction in the monthly payment may make the loan easier to repay for some borrowers.
In a number of circumstances, such as when one or more of the loans was being repaid in less than 10 years because of minimum payment requirements, a consolidation loan may reduce the monthly payment without extending the overall loan term beyond 10 years. In effect, the shorter-term loan is being extended a full decade. The total amount of interest paid will increase unless you continue to make the same monthly payment as before, in which case the total
amount of interest paid will decrease.The interest rate on consolidation loans is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one eighth of a percent and capped at 8.25%.
If a student consolidates their loans before they enter repayment, the interest rate used is the lower in-school interest rate. Although the rounding up of the weighted average can potentially cost the student as much as 0.12%, a student who consolidates before entering repayment can save as much as 0.6%, a substantial net savings.
Now you know about student loan consolidation. Check this blog for new posts to help you better understand the student loan consolidation process.
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