MarketWatch.com – Borrowers can apply for a consolidation loan at http://loanconsolidation.ed.gov, and anyone thinking about consolidation who has questions should visit www.ed.gov/offices/OSFAP/DCS/consolidation.html to learn more about the process and where to start, said Stephanie Babyak, Department of Education spokeswoman.

“It runs through a checklist of whether consolidation is something that you as a borrower might want to consider, what’s involved and how to go about it,” Babyak said.

Excluding those in default, about 30% of the outstanding federal student loan borrowers have variable-rate loans and may benefit from lower interest rates by consolidating, Babyak said.  As of Sept. 30, there were about 30 million federal student loan borrowers whose loans totaled about $550 billion, she said.

Borrowers who have both variable-rate (originated before July 1, 2006) and fixed-rate (after July 1, 2006) loans can consolidate both types, and the overall interest rate will be weighted accordingly, Kantowitz said.  By consolidating the two kinds of loans, the borrower ends up with just one monthly bill.

“You may say, ‘Won’t the interest rate on that consolidation loan be higher?” he said.  It’ll be higher than 2.5% but less than [your fixed-rate loans'] 6.8%.”

Consolidation can only be done once, so borrowers who have previously consolidated their federal loans aren’t eligible.  Moreover, private loans and federal loans can’t be consolidated together, Kantrowitz said. 

Kantrowitz said that when borrowers consolidate, they often agree to a longer repayment plan than the standard 10 years because lower monthly payments seem appealing, but borrowers should be cautious because they’ll end up paying more in interest over the term of the loan. 

If a borrower does take advantage of the cheaper debt, Kantrowitz advised using the savings to pay off costlier loans.  Otherwise, they’re really not saving.

Said Kantrowitz: ”[Some borrowers] will take the smallest monthly payment available to them on the federal loans, and they won’t use that extra money to pay down the more expensive debt — they’ll spend it.”

Bottom Line:  Borrowing for school is a lot easier than borrowing for your retirement.  Have your kids take a vested interest in their schooling (they may take it more seriously), the interest rates are low, and it’s an investment in their future earning power.  If you have children out of school with student loans, help them consolidate the loan at a low fixed rate.