Most lenders have stopped offering federal consolidation loans and very few are still offering private consolidation loans. What are your options if you want to get a bit of repayment relief and streamline your student loan finances?

Since July 2007 more than 90% of the lenders offering federal consolidation loans have suspended their participation in that program, in part because the loans are no longer profitable. The only major lender still offering consolidation loans is the U.S. Department of Education's Federal Direct Loan Consolidation Program.

Visit the FinAid site for a comprehensive list of lenders offering private consolidation loan programs.

But before you rush off to consolidate your education loans, there are several caveats and tips you should consider.

You cannot consolidate federal and private loans together.

Even if you could, you wouldn't want to consolidate federal loans into a private consolidation loan program, as that would switch you from a fixed rate into a higher variable rate and you would lose the favorable repayment benefits associated with federal education loans.

In most cases, consolidating your loans will not save you money.

Previously, you could use a federal consolidation loan to lock in a fixed rate on variable rate federal education loans. This would protect your loans from future rate increases and was particularly useful when interest rates hit historical lows during the 2004-05 academic year. But interest rates on new federal education loans have been fixed rates since July 1, 2006. (Note that you also cannot relock the rate on a variable rate loan that has already been consolidated, even if interest rates have dropped.)

The interest rate on a federal consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8th of a point and capped at 8.25%. (So if you have PLUS loans with an 8.5% interest rate, consolidating them can shave a quarter of a point off your interest rate.) Don't be fooled into thinking that consolidating your loans reduces the interest rate. The weighted average will be between the highest and lowest interest rates on the loans being consolidated. More importantly, the weighted average more or less preserves the underlying cost of the loans.

With private loan consolidation, however, it is possible you could get a lower interest rate on your private student loans if your credit score has improved significantly. For example, you may have had a very thin credit history when you first got your loans. If you've been in the workforce for a few years and have been repaying your debts responsibly, you may have a very good credit score by now. Since the interest rates on the private consolidation loan is pegged to your credit score, this can sometimes lead to a better rate. Typically you would need at least a 50 point improvement in your credit score to reduce the interest rate. On the other hand, lenders have increased the interest rates on their loans, so you might not save all that much. Also, if you had a cosigner on your original loans, you will need to beat your cosigner's credit score to get a better rate. For most borrowers this means at least a 100 point increase in the credit score.

Consolidation streamlines repayment with a single monthly payment.

Each year most students get one or two new education loans. After graduation, this can mean multiple monthly bills. Consolidating refinances these loans into a new loan with a single monthly payment, simplifying the repayment process. However, if all of your loans are with a single lender, you don't need to consolidate your loans to get a single monthly payment, as most lenders offer unified billing.

Consolidation can reduce the size of the monthly payment. 

The Federal Stafford and PLUS loans have a $50 minimum monthly payment. If an unsubsidized Stafford loan at 6.8% interest has a balance of $4,345 or less, the amortized payment will be below the $50 minimum and will be rounded up to $50. For PLUS loans at 8.5% interest the threshold is $4,033. So if you have at least one loan with a balance at repayment below the threshold, consolidating this loan with other loans may bring the total above the threshold, reducing the combined payment.

In effect such a consolidation loan is increasing the average loan term even if you remain with standard 10 year repayment. A $2,500 unsubsidized Stafford loan with a $50 minimum payment would normally be paid off in about 5 years. If you also had a $5,000 loan with a $58 monthly payment, the combined monthly payments would be $108 for 59 months followed by $58 for 61 months. By consolidating these loans, the combined monthly payment drops to $86 a month, but is the same for all ten years. The average life of each loan dollar increases from 4.6 years to 5.1 years since you are stretching out the $2,500 loan over 10 years instead of just five. This increases the total interest paid over the life of the loan by about $505, a 21% increase in the cost of the loan.

Federal loan consolidation provides access to alternate repayment plans that reduce your monthly payment but increase the total cost of the loan.

Of course, if you consolidate you have the option of stretching out the loan payment even further by choosing an alternate repayment plan. Extended repayment, for example, increases the loan term to up to 30 years, depending on the loan balance. Graduated repayment starts off with smaller payments and gradually increases the payments every two years. There are also repayment plans like income-contingent repayment and income-sensitive repayment that base the monthly payment on your income and not your debt.

But these alternate repayment plans will cost you. Increasing the loan term on an unsubsidized Stafford loan from 10 years to 20 years cuts the monthly payment by about a third, but more than doubles the interest paid over the life of the loan. So for a 34% reduction in the monthly payment, you will be increasing the cost of the loan by 118%.

You also do not need to consolidate to get access to some of the alternate repayment plans. If you have more than $30,000 in debt with a single lender, you can get extended repayment of up to 25 years without consolidating. Starting July 1, 2009, a new repayment plan called income-based repayment becomes available. It caps the monthly payment based on 15 percent of discretionary income, which is defined as the amount by which your income exceeds 150% of the poverty line. Any remaining debt is canceled after 25 years in repayment. You can use this plan even if your loans haven't been consolidated.  Income-based repayment is especially useful if you have low income and high debt.

Options for repayment relief through private consolidation loans are more limited.

Reductions in the monthly payment require increasing the term of the loan. But since most private student loans start off with a 20 or 25 year term, there isn't much room for repayment relief. For example, while increasing the term on a federal Stafford loan from 10 to 20 years can reduce the monthly payments by about a third, increasing the term on a private student loan from 20 to 30 years will usually reduce the monthly payments by less than 10% but will still increase the cost of the loan by more than 50%.

If you consolidate your loans, you may lose any discounts on your existing loans.

A consolidation loan pays off the balance on the original loans. Any discounts or other benefits associated with the original loans will be lost. The consolidation loan may offer its own discounts, but usually these are not as good as the discounts on the original loans. For example, loans consolidated with the Direct Loan program may receive a 0.25% interest rate reduction if the borrower signs up to have the monthly payments automatically debited from a bank account. If you are receiving an ongoing discount on your loans, it may not be worthwhile to consolidate. Also, some lenders have restrictions on their discounts that allow them to recapture fee waivers if you consolidate the loans within a certain time period. So read the terms on your existing loans carefully before considering a consolidation loan.

If you consolidate certain types of loans, such as the Perkins loan, you may lose some of the favorable repayment benefits such as loan forgiveness provisions associated with those loans.

Private consolidation loans may be used to release the cosigner from an obligation to repay the debt.

More than three-quarters of borrowers need a cosigner in order to obtain a  private student loan. Many lenders offer a cosigner release option, where the lender releases the cosigner from his or her obligation on the loan if the primary borrower has very good credit and has been making all of the payments on the loan on time (which means by the due date) for 24 or 48 months.

If your private student loan does not have a cosigner release option, however, you can accomplish the same result by consolidating your loans. You would need to obtain a private consolidation loan on your own credit, without a cosigner. The new loan, which doesn't have a cosigner, pays off the old loan. Since the remaining debt on the old loan is zero, the cosigner no longer has any obligation to repay that debt. Of course, you should only consider doing this if the interest rate on the new consolidation loan is less than or equal to the interest rate on the old loans, taking any fees on the new loan into account.

Deferments and forbearances can offer temporary relief for short-term financial difficulties.

If you are consolidating your loans in order to reduce your monthly payment, consider whether your financial difficulty is short-term or long-term. If your financial difficulty is more long-term, a consolidation loan may be better. But if you are experiencing a short-term problem, such as a recent job loss, a deferment or forbearance may be worth considering. These suspend or reduce the monthly payments for a period of time. Federal loans offer deferments and forbearances for up to 3 years, 1 year at a time. Private student loans offer forbearances for up to a year, in 3 or 6 month increments. (On federal loans you can change the repayment terms once a year, but this may reset the clock on your loan.)

During a forbearance interest continues to accrue and is capitalized, increasing the size of the loan. During a deferment interest continues to accrue on any unsubsidized loans, but the government pays the interest on any subsidized loans. An extended period of nonpayment can substantially increase the size of the loan, so you don't want to rely on a deferment or forbearance for a long-term financial problem. It will just dig you into a deeper hole.

The income-based repayment plan for federal education loans also offers some of the benefits of a deferment. If your income is below 150% of the poverty line, your monthly payment on an income-based repayment plan will be zero. It also provides a limited interest benefit on any subsidized Stafford loans (or the portion of a consolidation loan used to pay off a subsidized Stafford loan), with the government paying any accrued but unpaid interest for up to 3 years.

Ask the lender plenty of questions before consolidating your loans.

Some of the questions you should ask include:

1. What are the interest rates and fees on the loan? Be sure to ask about the interest rate and fees you will be charged, not just the best rates the lender offers. If the interest rate is variable, is there a cap on how high it can go? Ask for a full schedule of all fees, not just the origination and guarantee fees, such as late fees, forbearance fees and collection charges.
2. Is there a prepayment penalty? Federal education loans do not have prepayment penalties. The Higher Education Opportunity Act of 2008 added a ban on prepayment fees on private education loans.
3. What is the term of the loan?
4. What will be the total payments over the life of the loan? How much of that will be interest?

Do not feel pressured into accepting a consolidation loan immediately. You have 30 days after the lender approves your loan to decide whether to accept a private consolidation loan, so you have time to comparison shop. Take your time to carefully consider your options, as you may be repaying this loan for decades. There is also a 3-day buyer's remorse period, so you can cancel within three business days of accepting the loan without any interest or penalties.