In the last few years I have learned of some people who have needlessly cost themselves a lot of money for lack of information; I am writing this post hoping to help someone from making the same mistake. I have no affiliation with the loan consolidation services mentioned below, I just want to offer what I have learned while consolidating my own loans. This is not professional advice and there are no guarantees that all of the information is accurate. You may want to consult with a financial aid counselor to assess your unique circumstances. In other words, all the usual lawyerly caveats apply.
For those just beginning to come to terms with the fact that the government loans used to finance their education will have to be paid back, a short primer is in order. Some loans are eligible for consolidation and others are not. The loans most popular with graduate students, Federal Direct and Stafford loans are eligible and, as of July 2001, Perkins loans are also eligible as long as you have one outstanding Direct loan to consolidate with it.
The primary advantages of consolidation are: 1) it allows you to fix the rate of your loan (most government loans are floating rate loans with an interest rate cap), 2) at the time of consolidation it is usually possible to choose from a variety of repayment plans which can reduce monthly payments and 3) lenders offer incentives for consolidating loans with them. A reputable consolidation service will not charge fees for consolidation.
Potential disadvantages of consolidation are: 1) you may lose the grace period deferring repayment until after graduation and 2) the loss of eligibility for loan forgiveness programs offered by (a few private) schools.
When you consolidate you will be assigned a weighted average, rounded to the nearest 1/8th of a percentage point, of the interest rates for the loans consolidated. If you have a Direct loan with a floating rate of 2.77 and a Stafford loan with a rate of 3.5, for example, your weighted average will be determined by a formula which takes into account the differences in the interest rates and the amounts of the loans. If you are truly interested in the formula, you can email me and I’ll send it to you.
If you took out certain federal loans while attending a higher educational institution in Utah, even a private one such as BYU, and then subsequently took out additional qualifying loans while attending a higher educational institution somewhere else, you are eligible to consolidate all of your loans through the Utah Higher Educational Assistance Authority (www.uheaa.org). UHEAA offers by far the best terms for student loan consolidation that I am aware of. For example, most institutions that offer student loan consolidation services will offer a deduction in the interest rate to those who allow monthly direct debiting of their account. Previously the interest discount was around 1%, but over the last few years as interest rates fell most institutions lowered the discount. The federal government, for example, used to offer a 1.25% to those who consolidated through them, but now offers 0.25% (http://www.loanconsolidation.ed.gov/) which is a fairly typical discount. UHEAA, however, for reasons unknown to me, continues to offer 1.25%. This is the biggest advantage you can gain from using UHEAA–more generally however, if you work the system a little you can get yourself up to another 1.6% in interest rate deductions. If you played the game perfectly, you could pay as little as 1/20th of a percent on your loans. An average effort will still save you almost 2%–even if you are ineligible to consolidate through UHEAA.
Most of the loans I took out while I was in law school were Direct loans. The interest rate of Direct loans and Stafford loans is pegged to the 91-day T-bill plus a premium that varies with whether a student is (a) in school, grace or deferment (the "in school rate") or (b) repayment or forbearance (the "out of school rate"). This rate is set each year on July 1st, so for any given year it only matters what the 91-day T-bill discount rate was on the preceding July 1st. On July 1, 2004 the 91-day T-bill rate was 1.07% and the add-on premium for (a) above is 1.7% and for (b) above is 2.3%. In other words, the "in school rate" is 2.77% and the "out of school rate" is 3.37%. If you consolidate while in school you can lock in the lower rate permanently. The federal government is aware of this loophole and has blessed it in the Federal Register, Volume 64, Number 210, dated November 1, 1999.
It is worth noting that the 91-day T-bill rate will likely be higher next July than it was in 2004 so locking in rates now might be a good idea. (If you are nowhere near graduation and have no income to service loan payments you should check to see if locking in the rate will cause you to go into repayment.)
As mentioned earlier, many companies give you incentives to consolidate through them. Most common is an interest rate deduction (typically 1%) for making a predetermined number of payments on time and the already-mentioned interest rate deduction for setting up direct debit payments from your bank account (typically 0.25%, but 1.25% through UHEAA). Many private companies require that you continue to make all of your payments on time in order to keep your interest rate deduction and a payment that is even a day late can cost you the deduction for the remainder of the term of your loan.
THE PERFECT GAME: If a current student had only unconsolidated Direct or Stafford loans and chose to consolidate all of her debt through UHEAA while in school (so as to take advantage of the lower add-on premium afforded current students), set up payments through direct debiting of her account and made her first 48 payments on time, she would lock in a rate of 0.05%. 2.77% – 1.25% – 1.0% = 0.05%! If you were paying on $100,000 over 30 years at that rate, you would average only $2.09 a month in interest (I think I did the math right)! If you consolidated through the federal government the best rate you could make under that scenario would be 1.05% (still incredibly low!). The difference in interest between the two rates over 30 years would be $15,865.20. Moral of the story, use UHEAA if you can but in any case don’t put off thinking about this since rates are likely going up.