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Most graduates leave school with a number of different student loans, racked up throughout their years in college. Each of these loans likely comes with different terms, payments, servicers, and statements. The sheer amount of information and numbers can be difficult to track.
If you feel overwhelmed with managing your student loan debt, don’t panic. You do have options. One way to make student loans more manageable is through consolidation.
When you consolidate your debt, you combine all those loans into one. You do this by taking out a new loan for the amount of the balances of the existing loans, use the newly borrowed money to repay all the older loans, and then focus on repaying your one new loan. This simplifies your financial situation and makes it easier to keep track of loan terms, payments, and other information you need to know. Other benefits of consolidation could include securing more favorable interest rates (if you also refinance) and lower monthly payments (by extending the repayment term).
Private and federal student loan consolidation: know the risks first
Before you choose to consolidate your loans, examine your situation carefully to determine if this is the best course of action. This isn’t a solution that works well for everyone (even if you do have several different loans to manage). Consolidation doesn’t always result in a lower interest rate, plus lower monthly payments usually means paying the loan over a longer period of time and spending more on interest.
You also need to know that the process is different for federal student loans and private loans, especially if you’re trying to manage each. Private lenders may be able to consolidate both private and federal loans, but you cannot roll private and federal loans into one new federal Direct Consolidation Loan.
And just because you can use private student loan consolidation to include your federal loans doesn’t mean it’s a good idea. Doing so eliminates any benefits or eligibility for repayment plans or loan forgiveness that you could have received from a federal program.
If you think you’ll need and income-driven repayment plan or want to pursue forgiveness options, it’s best not to mix federal and private loans.
Consolidating federal student loans
When you choose to consolidate your federal student loans, the government will combine all your separate loans into a single new loan, known as a Direct Consolidation Loan.
Most federal student loans are eligible for consolidation, including subsidized and unsubsidized Direct Loans, subsidized and unsubsidized Federal Stafford Loans, Direct PLUS Loans, Supplemental Loans for Students (SLS), Federal Nursing Loans, and Health Education Assistance Loans.
Although the Perkins Loan program came to an end in September, 2017, old Perkins Loans are still eligible for consolidation, as well.
If you have a PLUS loan in the name of a parent, that loan cannot be transferred to the student during consolidation. You also cannot consolidate a defaulted loan until you make a repayment agreement with the loan’s servicer or unless you repay the new consolidated loan with one of the government’s eligible repayment plans.
Access to those repayment plans is one of the benefits of Direct Consolidation Loans for some borrowers. With the new loan, you could be eligible for income-driven repayment plans and possibly even forgiveness programs that you weren’t able to use prior to consolidating.
You can also enjoy the benefits offered by consolidating any debt, such as one, single payment and potentially lower monthly payments. However, federal consolidation doesn’t result in a better interest rate. Rather, the new rate is a weighted average of all the interest rates on your student loans, plus a small percentage on top.
If you’re only interested in simplifying your situation and won’t take advantage of any repayment plans, consider finding other ways of tracking your debt and managing repayment. That’s because Direct Consolidation Loans have drawbacks, too.
A lower monthly payment means paying the loan over a longer period of time – in turn, the loan costs you more money since you’ll also pay interest longer. Also, you lose the ability to strategically target your highest interest and/or highest balance loans using a method such as the debt avalanche or snowball.
Be sure to explore all your options and weigh which benefits – those provided by your original loans or those you could access with direct consolidation – will help you the most.
Private student loan consolidation
Private loans are not eligible for Direct Consolidation Loans. If you want to explore private student loan consolidation, you’ll need to work with a private lender. Requirements and eligibility will vary from one to another.
Some private lenders will require you borrow a minimum amount. And some might use different criteria to evaluate your creditworthiness than others. It’s best to reach out to individual lenders and ask for their specific rules around eligibility; compare the results to one another to determine what might be a good fit for you.
Both the benefits and drawbacks of consolidating your private student loans are similar to consolidating federal loans. You may benefit by creating an easier-to-manage financial situation, getting better terms, or securing lower monthly payments.
One big benefit of private student loan consolidation is the ability to refinance and potentially secure a much lower interest rate. In the case of refinancing, your rate will be based on your creditworthiness rather than a weighted average.
If your credit score has significantly improved from the time you took out your loans to now, or you have built a solid income and employment history, you’re more likely to get a low rate that could make consolidation a smart financial move.
Keep in mind whether you’re also extending the repayment term, though. Again, with more payments comes more interest. Plus you still lose the initial benefits provided by your original loan servicer.
And while there’s no cost to originate a federal Direct Consolidation Loan, some private lenders will charge an origination fee.
Again, it’s important to evaluate all your options before making a decision.
What about refinancing?
As you probably noticed, refinancing is very similar to consolidation. However, you don’t necessarily have to consolidate in order to refinance. You can talk to lenders about refinancing a single loan rather than combining many into one new loan.
This might make more sense if you have fewer loans and just one has a very high interest rate. You can refinance to a lower rate and maintain the original benefits and rates on all your other loans.
The federal government will not refinance your loans; they only offer direct consolidation. Private lenders will refinance both federal and private student loans.
If you want to compare the immediate benefits of Direct Loan consolidation vs. private consolidation and refinancing for your situation, check out the calculator below:
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Consolidation vs. Refinancing Calculator
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Current Consolidation Refinancing Total amount paid — — — Monthly payment — — — Interest rate — — — Payoff date — — —
Refinancing is the only way to lower your interest rate but you may lose some of the safeguards associated with having federal loans, so make sure you are fully educated on the decision by reading our recommended resources below:
Again, just like with consolidation, you may not want to refinance any federal loans because you’ll lose your eligibility for government-backed repayment plans. But if you don’t plan to use those programs and can financially benefit by refinancing to a lower interest rate, this may be a viable option for you.
See below for our list of the best private lenders for consolidation and refinancing. These companies offers some of the lowest rates and fees in the industry.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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