Office of Student Aid : Loans : Loan Consolidation : Advantages and Disadvantages of Loan Consolidation

Advantages:

Offers a fixed interest rate.

Reduces monthly payment by extending the loan term.

May result in fewer bills to handle.

May offer various repayment options available including:

• Standard Repayment--you pay a fixed amount each month until your loan is paid in full.
• Extended Repayment--allows you to extend loan repayment over a period of ten to thirty years, depending on your loan amount.
• Graduated Repayment--allows you to make smaller payments at first, and larger payments later. This is a good strategy for students who cannot make large payments immediately after graduation. Payments start low and increase every few years.
• Income Contingent Repayment--your monthly payment is based on your yearly income, family size, and loan amount. Your payments rise and fall with your income. After 25 years, any remaining balance on the loan is forgiven, however you may have to pay taxes on the amount forgiven. Payments can never exceed 20% of your discretionary income.

Most consolidation loan programs do not have prepayment penalties. Prepayment on your loan will reduce your overall interest costs by paying the loan off early.

Disadvantages:

You may lose deferment options.

You will pay more interest over time due to the extended repayment period (unless you are able to prepay or make additional payments on your loan).

You may lose payback benefits from current lenders (i.e., interest rate reductions for submitting on-time payments).

For more information contact:
Federal Direct Consolidation Loans Information Center (1-800-557-7392)