Balancing numerous monthly student loan payments can be a juggling act worthy of a three-ring circus. Before you toss in your juggling balls and opt for consolidating your student loans, there are several crucial questions you must ask.

Are there any origination fees?

An origination fee is money a borrower would pay to the lender in order to cover costs associated with starting or consolidating your student loans. Origination fees typically run from 0 to 5%. Obviously, it would be to your benefit to seek a consolidation with no origination fee. Such loans are not uncommon, so keep your eyes open for them.

Is there a prepayment penalty?

A prepayment penalty is a fee charged to the borrower if he should choose to pay the entire loan off early. Some lenders include prepayment penalties to maintain a certain level of profit from the loan. Prepayment penalties vary considerably. Most student consolidation loans exclude them entirely, but be alert, since others may charge more than a few months’ interest for early pay-off. Look for a consolidation loan that does not include a prepayment penalty. The last thing you want to do is punish yourself for smart loan pay-off by realizing too late you have been slapped with a tail-end penalty.

What is the maximum interest rate?

It is important to know what your current interest rates are and what your new interest rate will be. If the new interest rate will be more, you may want to reconsider consolidating your student loans and return to your juggling, but not necessarily. The life of the loan (as explained below) will determine how low your overall monthly payments are, despite a change in interest rate.

What is the life of the new loan?

In order to receive a lower monthly payment, the length or life of the loan is stretched or extended. For example, if you are paying $500 a month and have 10 years left, but want to reduce your monthly payment to less than $300, consolidation may well do that for you. However, the loan period will be stretched into, for example, a 25-year loan, resulting in more interest in the long run. It does, however, make the payments more affordable in the short term, and, if you do not have a prepayment penalty, you can pay the loan off more quickly and pay less interest overall.

Will my consolidated loan still be eligible for loan forgiveness programs?

Situations surrounding loan forgiveness programs are generally about as varied as the people applying for the loans. When you are consolidating your student loans, what you are actually doing is taking out a new loan to pay off the multiple old loans. If one of your previous loans is eligible for forgiveness, it will no longer be eligible under the same terms after it is consolidated, because that old loan no longer exists. The consolidation may, however, be eligible under the new federal forgiveness program. Check for forgiveness and cancellation information on each of the old loans as well as on the new consolidated loan before making any final decision.

Final Thoughts

Consolidation is not for everyone. Knowing which questions you must ask before consolidating your student loans will help you make an informed decision. Your juggling days may be over!

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