Borrowers with federal student loans may choose to consolidate their loans to get a single payment and extend their repayment period.  However, borrowers should question those offering to consolidate their loans regarding benefits they could lose with a consolidated loan. One example of lost benefits would be loan forgiveness provisions for certain teachers. If a teacher has already consolidated his or her loans, the loan forgiveness provision may not apply.

The lower interest rate occurs because the interest rates on most federal student loans are variable, but the interest rate on a federal consolidated loan is a fixed rate and locked in for the life of the loan. Interest rates on federal Stafford loans are recalculated annually each July 1, and fluctuate with the rate of short-term federal securities.

Federal Regulations state that the interest rate on a Federal Consolidation Loan disbursed on or after July 1, 1994 shall be the weighted average of the interest rates on the loans consolidated, rounded upward to the nearest whole percent.  If you have student loans that were disbursed before July 1, 1998, your consolidation rate could be higher than 3.37%.  If the amount of the Federal Consolidation Loan is less than $7,500, the borrower's repayment schedule may not exceed 10 years.

If you must consolidate, the best time is during your grace period.  This will ensure the lowest possible interest rate.  To avoid losing any portion of your grace period, enter the grace period end date on the federal consolidation loan application.  Don't forget to ask if you will lose any loan forgiveness provisions available to Stafford Loan borrowers.