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What is private student loan consolidation?

Updated on July 6, 2009


Private student loan consolidation essentially means refinancing all your student loans into one loan. Therefore you're only paying one bank or lender a month. Thus, if you're paying more than 1 lender when paying bills, you should, at least, look into consolidating your private student loans (and your federal student loans for that matter.)


There are a handful of elements or moving parts to consider during a private student loan consolidation. And they can affect the total cost. The same as any other loans, there are 3 main areas where the bank can charge you to make their money:

  • fixed costs
  • interest rates
  • penalties

There's also a fourth area that comes into play, called promotions. This one may actually reduce your consolidated student loans.


Have you seen the words "application fees" when applying for loans. They tell you that it's to cover the paper work in processing your loan. These fees are usually fixed, say $30 flat, so that to consolidate private student loans totalling $25,000 will have the same application fee as a $100,000 loan.

Another fixed fee to consider are "origination fees." Origination fees are calculated as a percentage of the total amount loan, typically 1%-3%. In the mortgage industry, origination fees are also referred as "points". The "points" you are charged depends on the interest rate of the loan. The lower the interest rate, the higher the origination fees are assessed. And vice-versa.

There's a term in the mortgage industry that you can "buy down the interest rate". This is done by paying higher points. You do this in order to lower down the monthly payments.

Additionally, a big chunk of the origination fee goes to the broker's commission. They have to make money somehow. It seems that the student loan industry have the same elements. So it is always good to know how fixed costs work.

In today's extra competitive and extremely tight lending economy, many lenders are discounting the fixed costs to consolidate private student loans. Some are taking them off completely. So if you're looking to consolidate your private student loans, you should first look for programs discounting their origination and application fees.


The interest rate is where the bank gets the majority of its income by lending you the student loan. Because of the tough economic times, many lenders give incentives lower interest rates so that you may consolidate your private student loans. Sometimes, the incentives are for the life of the loan.

  • use of automatic electronic payments
  • consecutive timely payments

The above two incentives work can work hand-in-hand to reduce the interest rates of student loans. With automatic payments, the banks will take out the monthly bills from your checking account directly. They get it faster and on time. Which leads to the second incentive, consecutive timely payments for a stated number of months.

For example, some lenders will lower your interest rate if you pay 36 consecutive monthly bills without being late. Through out the loan, that could be a lot. By getting to know the incentives, you can take advantage of them.

Another thing that could lower the total cost of the student loan is choosing a fixed rate loan over that a variable rate loan. A fixed rate private student loan consolidation program gives you a predictable cost every month. A variable rate can change month-to-month depending on various financial factors, including the federal interest rate and economical conditions.

In the early years of the 2000 decade to date, interest rates have been around 4-7%. However, from the 70's to most of the 80's, interest rates were high. In double digits! To consolidate private student loans with a fixed rate can avoid the high cycles of the interest rate roller coaster. But you ought to catch it at the right time.


Much like many home mortgages issued in the nineties and older, some student loans carry pre-payment penalties. You get charged if you pay the loan off ahead of schedule. These have been industry standards so that the lender does not lose money in the loan. Usually, the penalty is a percentage of the remaining balance. So for example, if you paid a 5-year loan in 3 years. There would be a percentage of the 2 remaining years to pay as penalty.

But in consolidating private student loans, the industry has been very competitive, many banks forego pre-payment penalties to attract borrowers. You should find those programs.

PROMOTIONS e.g. Private Student Loans Credit

To earn your business, lenders give incentives from time to time. Some give incentives such as a private student loans credit to lower the total cost. Commonly used are

  • Rebates in a form of a check that they'll issue you when you finish paying off the loan.
  • "No last month payment". Where the lender picks up the last month of the bill.

Since these are promotions, they're not always available. But sometimes, it helps to ask there are any promotions going on.


During tough economic times, you need all that you can do to relieve the stress. One way is to control of your finances, including your debts. For student loans, there are ways to save money. But you must know what they are. When looking to consolidate your private student loans, be aware of the costs. If you have to compromise, understand the advantage you're gaining and the benefit you'll be losing. And most of all shop, shop, shop for the right lender. And ask, ask, ask the right questions.


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