There are two types of federal loan consolidation. Your federal student loans can be consolidated through a private lender or through the government. Consolidation through the government is not as well known, and surprisingly it is not always the best option – although it’s usually still a better option than not consolidating at all.
Federal Loan Consolidation
Federal student loan consolidation by either method is a good move. You can deal with only one lender and only one loan, which generally means lower interest rates, lower finance charges, and lower monthly payments. Additionally, you will be able to obtain easier payment terms with most consolidations than you were able to obtain with the original student loans.
The Department of Education offers federal loan consolidation, but only under certain circumstances. The consolidation is fairly limited, as well, because only loans obtained through the federal financial aid program, such as Stafford loans, may be consolidated. Another severe limitation is that loans with an in-school status, meaning that you are still enrolled in your degree program, are not eligible, and you can only consolidate after graduation.
There are a few advantages to these loans, however. The loan from the Department of Education can carry the lowest available interest rates. You can also maintain your interest subsidy on previously subsidized loans, which is not possible with private loan consolidation.
Private Student Loan Consolidation
For most people, federal loan consolidation through a private lender is the best option. With this method you can easily consolidate all of your student loans, both through federal programs and private loans, into one easy to manage debt. Private consolidation also allows you to consolidate before you graduate school, which can save you a lot of money in interest and finance charges.
The only real downside to private consolidation of your student debt is that any subsidized loans you consolidate will begin to accrue interest. The government only pays interest on subsidized loans if they are with the original lender, or consolidated through the Department of Education. However, you can omit this pitfall by only consolidating unsubsidized loans.