by Jeff Wallace

If you are a parent of a soon-to-be college graduate, or you are a recent college graduate, you probably receive information about consolidating your student loans.

As a result, you may ask yourself, “What is the advantage of consolidating my loans?” The fact is, there are a number of advantages to consolidating your student loans.

By consolidating, you can lower your monthly payment by extending your repayment terms. Loans with variable interest rates will get a fixed interest rate. If you have multiple student loans, you can combine your loans into one easy, affordable payment to one lender.

The first step in consolidating loans is learning what discounts lenders offer. All lenders compute the interest rate the exact same way and from that point they offer discounts to gain your business.

The second step, and the one most borrowers overlook, is to figure out how likely you are to actually earn the discounts being offered. Every lender is different on how you qualify for the discount. Many have details in the fine print that can cause you to lose the discount. We refer to these points as the “gotchas.”

Gotchas are typically glossed over or buried in the details of consolidation loans. They can be easily missed or misunderstood, but all ultimately cost the borrower. Based on our research and discussion with students and parents, we have identified the most common ones:

Most discounts are tied to a borrower making a certain number of on-time payments before the discounts are earned. What you may not know is that to keep a discount, borrowers have to make the payment on time for the life of the loan. One late payment over the 20 to 30 years you have the loan could likely eliminate the discount. Making sure you understand how a lender defines the “grace period” before considering a payment late is important. It can range from zero to 15 days.
The opportunity to roll all of your debt, including credit cards, private loans and education loans, into one loan has its own set of gotchas. To only have one loan payment each month is tempting, but purchasing a loan of this type takes your education loans out of the Federal Student Loan program, causing you to lose several unique benefits. First, Federal Student Loans have a low interest rate cap of 8.25 percent. In addition, you lose the options of deferment or forbearance. Find out the maximum interest rate the lender can charge you.
Many lenders will inform borrowers that it is better to combine all of your education loans into one consolidation loan. But everyone’s education debt is different. Depending on your financial needs, consolidation may not be in your best interest. Be sure to research all of your options.
Automatic withdrawal from a checking account in exchange for a discount has many gotchas that can trigger losing the discount. When using automatic withdrawal, always know your payment date so you have enough money in your account at the time of payment. You could lose your benefit if your lender does not receive payment for a bill.
Some lenders will advertise sending bills via e-mail. This avoids mailing a paper bill and is much easier to process. But if you change your e-mail address and forget to tell your consolidator, you could lose your benefit. It only takes one undeliverable e-mail message bounced back to the lender for you to lose the discount.
Lenders will offer you the best deals on their borrower discounts. With some lenders, the only way to get their discounts is to have all of your loans with that lender. If you even have just one loan with another lender, you may not get the discount. Be sure to read through your options and ask questions when you aren’t sure.
There are many great benefits and loan opportunities out there. Research your options before you make lifetime financial decisions. Understand what you need to do to earn the benefits and what you need to do to keep the benefits. Read all the details and ask the important questions before signing anything and choosing a lender. And, if it seems too good to be true, ask for it in writing.

Finally, look for benefits that become permanent after you qualify. That means you cannot lose the benefit unless you default on the loan. This may save you from a gotcha.