Student Loan Consolidation: There are several paths you might take both before and after your education, making student loan consolidation a very complicated scenario.
Whether you are refinancing into private student loans or combining into government Direct Loans will determine your consolidation alternatives; each has advantages and disadvantages of its own.
What is student loan consolidation?
Consolidating several student loans with varying interest rates and terms into one loan is known as student loan consolidation.
There are two primary methods for loan consolidation related to education.
- Consolidating federal student loans involves applying for a new Direct Consolidation Loan from the US Department of Education.
- Consolidating your college loans privately by refinancing them with a private lender.
What is federal student loan consolidation?
Consolidation of federal student loans combines all of your current federal loans into a single new loan with a term that can be anywhere from 10 to 30 years. You will only have to make one monthly loan payment to one loan servicer with a new fixed rate if you choose to consolidate your federal student loans. Here’s more information about how it functions.
Consolidate your federal debts
Your federal student loans are all paid off by the government when you are authorized for a federal debt consolidation. The previous loans vanish. A single new loan known as a Direct Consolidation Loan takes their place.
There isn’t an origination fee when you apply for a Direct Consolidation Loan. It’s crucial to remember that a direct consolidation loan cannot be used to pay off any private student loans you may have. This is so that borrowers can make their federal student loan payments simpler. Direct Consolidation is a federal loan program. You must pursue private student loan consolidation if you wish to combine a combination of federal and private debt.
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Get access to government loan repayment schemes
There are a few main advantages to consolidating student loans through the federal government. One benefit is that it entitles you to several government-sponsored student loan repayment plans. Here are some significant ones.
Forgiveness of Public Service Loans
For educators, government workers, and anybody employed by a nonprofit, one path to loan forgiveness is the Public Service Loan Forgiveness (PSLF) program. Basically, after you’ve made 120 payments while working for a qualifying job, the remaining amount of your student loan debt is cancelled. Service members in the armed forces have access to multiple programs, including this one. Regretfully, not all federal college loans qualify for PSLF. Federal Direct Consolidation Loans, however, are acceptable.
Plans for repayment based on income
These programs will adjust your monthly payment to reflect your income. Only borrowers with Direct Loans or federally consolidated loans are eligible for several of the government’s income-driven repayment options. (For example, to be eligible for income-driven repayment, you must consolidate parent PLUS Loans.)
Postponement and patience
Loan payments are suspended for a while under both deferment and forbearance. All federal student loans are eligible for these safeguards. These advantages are yours to keep even if you consolidate your federal student loans.
Acquire one set interest rate.
Keeping track of all your statements, repayment terms, and interest rates is one of the most difficult aspects of repaying many lenders. However, with consolidation, there is just one lender you pay and one fixed interest rate.
Keep in mind that straight consolidation of student loans makes payments easier, but it doesn’t save you money. When you get a straight consolidation loan, your new interest rate is just the average of all the rates you had before.
In other words, your interest rates will likely stay the same. The rates on your bigger loans will have a bigger effect on the overall rate. How much will your rate be after you combine your debt? Use a weighted interest rate tool to get an idea.
Keep in mind that the weighted interest rate you get will be rounded up to the eighth of a percent. By way of example, if the tool shows a weighted interest rate of 5.67%, the rate after consolidation will be 5.75%.
Advantages of student loan consolidation
The following are the main advantages of loan consolidation:
- It will be much simpler for you to understand and plan for as you will just have one loan with one monthly payment.
- The amount due each month may actually decrease
- You may be able to access more income-driven repayment plan alternatives through consolidation, which could result in a less monthly payment amount.
- Consolidation may provide you access to forgiveness options like income-driven repayment or Public Service Loan Forgiveness (PSLF) if you combine loans other than direct loans.
a fixed rate of interest
Drawbacks of Student Loan Consolidation
- You may spend extra money. You will probably pay more in interest throughout the course of the loan if you extend the payback period.
- Your principle might rise. Any unpaid interest on your separate loans is rolled into the principle of the new, combined loan when you consolidate. As a result, you owe interest on a larger sum.
- You might no longer have emergency protection. There is a post-graduation grace period and ample deference and forbearance options available with federal loans. These safety nets are lost if you decide to consolidate under a private loan servicer.
- You forfeit additional advantages. Benefits associated with federal loans, including as income-driven repayment alternatives, Perkins Loan forgiveness, and Public Service Loan Forgiveness (PSLF), may be lost during consolidation.
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- You might not receive as much forgiveness. Consolidation may undo any progress you’ve made toward debt forgiveness programs like PSLF.
Alternatives to student loan consolidation
Not everyone can benefit from student loan consolidation. Take into account these options if your credit score isn’t fair to superb (many private lenders need a score of at least 650) or if you’re having trouble making your present payments.
- By asking for student loan deferral, you may be able to put a stop to your federal student loans (and interest accrual) if you’re changing jobs, returning to school, or experiencing financial or medical hardship.
- Forbearance on student loans is comparable to deferment, with the exception that you must pay back all interest accumulated during the forbearance term. Forbearance is also only available for a maximum of one year at a time.
- You might be able to apply for income-driven repayment plans without first consolidating your loans if you are unable to make the monthly payments on your federal student loans.
- You might attempt to work out new conditions of payment with your loan servicer if you fall behind on your payments.
- It can make sense to continue with your present plan if you are not eligible for private student loan consolidation, if you would like not to lose the benefits of certain federal loans, or if you would prefer not to extend your payback term. Later on, you can always work toward bettering your financial circumstances and becoming eligible for refinancing.
How can I start the process of consolidating my student loans?
Enrolling as soon as you’re certain you want to consolidate student loans is advisable because the procedure can take one to two months. For both federal and private consolidation, different procedures apply.
How to start consolidating your federal student loans
The Department of Education offers an online application for federal loan consolidation.
- Get your loan application started. To start the “Federal Direct Consolidation Loan Application and Promissory Note,” log into your studentaid.gov account.
- Select your strategy. Select the loans you wish to consolidate first. (Note: You can omit loans that have special benefits, such as a Perkins Loan that you believe may be forgiven.) Next, compare plans using the Department of Education’s Loan Simulator tool before selecting one.
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How to start consolidating your private student loans
- Investigating your possibilities is the first step towards refinancing your student debt.
- To get an indication of rates, shop around. Interest rates offered by various private loan servicers vary. Apply for pre-qualification with as many service providers as you can to see what they have to offer. (Pre-qualifications employ a “soft credit pull,” which has no negative impact on your credit score.)
- Examine the annual percentage rates. The most effective method for comparing consolidation offers is to compare annual percentage rates, or APRs. This is so that you have a more accurate idea of the entire cost of the loan as the APR includes various costs in addition to the interest rate. It is preferable if the APR is lower.
- Think about additional benefits. While significant, APR is not everything. A “student loan refinance bonus” is a type of signing bonus that certain loan servicers provide to win your business. Others allow you to select the length of your payments. Consider each of these aspects before choosing a private loan servicer to consolidate with. Then, to ensure you’re saving as much money as possible throughout your loan, use a student loan refinance calculator.
- Fill out the application completely. Apply for approval as soon as you’ve chosen a service provider. (Take note that applying for more than one servicer can result in a “hard credit pull,” which lowers your credit score.)
