Seeing your child graduate from college is one of the proudest moments a parent will experience. College is hard work, and your child’s efforts are about to be rewarded. With a college degree, your child’s potential opportunities seem limitless. He or she will be eligible for better jobs, have more opportunities to advance, and have a higher income-earning potential. The knowledge that has taken the past four years to learn will serve a college graduate well throughout his or her entire life.

It is no wonder that so many parents decide to help finance their child’s undergraduate and even graduate education. Some parents will set aside money for their child’s education. However, many parents will decide to take out student loans on their child’s behalf. Parents may opt to take out federal student loans, like the PLUS Loan, or private student loans. These loans are subject to the same fixed or variable interest rates and repayment terms as the student loans a student takes out.

How the Consolidation Process Works

When you take out a $10,000 student loan for your child, you will not just owe the lender $10,000. You are also responsible for the interest. Often, that interest begins accruing as soon as the first disbursement check is sent out. Some parents will start repaying the loan immediately, while others will wait to repay the loan until after their child graduates. In the eyes of the lender, you are responsible for repaying the loan, not your child. If payments are not made in a timely fashion, your credit will be negatively impacted.

Parents can take advantage of the student loan consolidation process. The process offers you lower monthly payments as the life of the loan is extended. In some cases, loans can be extended 20 additional years. You will be able to fix your interest rate, which means you no longer have to worry about variable rates. Plus, you will just receive one monthly bill, instead of three, four, or six bills. Separate consolidations will be done for federal and private student loans. In both cases, you will need to meet the following qualifications:

  • Your total student loan debt must be at least $7,500.
  • Your child can no longer be enrolled in the educational program the money was taken out to finance. He or she needs to have either graduated or withdrawn from school.
  • Student loans need to be in good standing.

Parents will only be able to consolidate the loans they initiated. If the loan was taken out in their names, they will be able to consolidate it. If they co-signed student loans for their child, the child will have to consolidate those loans.

Is It Right Financially?

Student loan consolidation will buy you more time to pay off your loans, but may not be the most financially-sound decision. View your student loans just as you would your home or auto loans. Assess your financial situation carefully, and make sure that consolidating will not cost you more in the long run. Here are a few factors to consider:

  • Extension – Extending the life of the loan may sound like a good idea, but can cost you significantly more in the long run. Each time you make a payment you are also paying interest. The more payments you have, the more interest you pay. You can end up paying hundreds if not thousands of more dollars in interest when you increase the life of your loan by 10 or 20 years.
  • Interest Rate – Parents may choose to consolidate their private student loans to get a fixed interest rate. Remember, this new fixed interest rate will apply to all of the outstanding student loans you are consolidating. You may have two large loans with low interest and five small loans with high interest. Make sure the new fixed rate will not end up costing you more in the long run.
  • Fees – There isn’t a fee associated with consolidating federal student loans. However, there can be fees when you consolidate private loans. Many banks will charge origination fees that can range between 1% and 5% of the total loan. Some companies may charge fees to maintain the account. Also, ask the lender if there are any prepayment penalties in the event that you decide to pay off the loan early.