This is the time of year when the buzz starts up about student loan consolidation. Some people benefit from consolidating, others don't, and borrowers want to know which camp they fall in.
Here are the facts: Until recently, borrowers were able to consolidate their loans each year at a low-interest rate, sometimes under 3 percent. In 2005, Congress set a fixed rate for Stafford and PLUS loans, which means that loans originating after July 1, 2006, largely won't benefit from consolidation. In fact, if you do decide to consolidate, your interest rate will increase slightly.
If your loan originated before that date, you're working with a variable rate loan, and you'll benefit from consolidating come July 1, when rates are set to drop by 3 percent, according to Mark Kantrowitz, publisher of FinAid.org.
To figure out what kind of loans you have, do a little backtracking. What year did you enter school? What year did you graduate? How many years of loans do you have, total?
You may find that you have both, particularly if you graduated in the last few years. "Undergraduate students who graduated last year and who had not previously consolidated their loans would have three years of variable rate loans and one year of fixed rate loans. Undergraduate students graduating this year would have three years of variable rate loans and two years of fixed rate loans," explains Kantrowitz.
No matter your situation, here's how to handle things when July 1 rolls around:
If your loans are fixed, shy away from consolidatingIn this case, there are no savings associated with consolidating. However, some borrowers choose to consolidate anyway, for a couple of different reasons. By definition, it makes things a bit simpler by putting your loans all on one payment. This can ease your mind and also help to ensure that payments are going in on time each month. However, Kantrowitz says that these days, most lenders offer unified billing anyway, so consolidating for this reason is largely unnecessary.
Another potential perk of consolidation is that it comes with a wider variety of repayment options. If you're struggling to make ends meet, you can increase the life of the loan, making your monthly payments smaller.
Consolidate your variable loans
If your loans are variable, rates reset annually on July 1, but you can only consolidate once. This July is a great time to consolidate if you haven't already. Consolidating will bring Stafford Loans that are in repayment to an interest rate of 4.25 percent, and PLUS loans to 5.125 percent. If you're still in school, or under the grace period after graduation, your Stafford Loan rate will be 3.625 percent. This is not only the biggest drop ever in the interest rates on variable rate loans, but according to Kantrowitz, they are the lowest rates in the history of the student loan program. So take advantage, and you could save several thousand dollars over the life of the loan, depending on how much you borrowed in the first place.
Don’t be surprised if you have trouble finding a lenderConsolidation loans are no longer all that profitable, and many lenders have pulled out of the business, including Sallie Mae, according to Martha Holler, a spokesperson for Sallie Mae. The current economy and credit crunch aren't helping matters. If you shop around and can't find a private loan company to consolidate with, Kantrowitz suggests turning to the Federal Direct Consolidation Loan program (loanconsolidation.ed.gov). You can consolidate both Direct Loans, which are issued by the government, and private loans (typically called Federal Family Education Loans or FFELs) through this program. The plan will give you all the options offered by private lenders, namely, multiple repayment plans and only one check to write each month.
Stick with a 10-year loan if possible
As I mentioned, when you consolidate, you'll be given the option to lower your monthly payments by repaying the loan over the course of 20 or even 30 years instead of the standard 10.
"In some cases, you can cut your monthly payment in half, but you will pay more over the life of the loan," warns Holler. Make sure that you've exhausted all other options, such as making cuts in your budget or working a few overtime hours, and resort to this as a last step.
If you, like 75 percent of your peers, came out of college with not just student loans but also a load of credit card debt, and you're feeling squeezed, it may make sense to extend your loan and focus on the credit cards for the time being. Student loan debt is largely considered good debt, because the interest rates are about as low as they come, and they generally help round out the credit reports of borrowers who may not have much of a history otherwise. The interest rates on credit cards can be three or even four times that of a student loan, so you'll save in the long run by throwing the bulk of your money at that debt first.
Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .