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If you’re looking for ways to simplify your education debt or pay it down faster, student loan consolidation can help. According to the latest student loan debt statistics, 12 million federal loan borrowers have Direct Consolidation Loans, and many others have refinanced their debt with private lenders.
For many, the idea of consolidating student loans is appealing. But while you might get some benefits from consolidating, you might also lose some in the process. This guide will walk you through how student loan consolidation works and how to decide if it’s right for you.
How student loan consolidation works
Student loan consolidation is the process of rolling one or more loans into a new loan to take advantage of a single monthly payment, a potentially lower interest rate, or special federal loan protections.
There are two main types of student loan consolidation: federal loan consolidation through the Direct Loan Consolidation Program and private student loan consolidation, more often called refinancing.
Direct Loan Consolidation
The Direct Loan Consolidation Program allows you to combine one or more federal student loans into one new loan under the Direct Loan Program. You don’t need to undergo a credit check to qualify for federal student loan consolidation, but you can’t consolidate a defaulted loan unless you make at least three consecutive monthly payments on it.
If you have multiple federal loans, consolidating them can simplify your debt repayment by combining them into one. Plus, if your loan isn’t already part of the Direct Loan Program, consolidating could qualify you for certain repayment plans and forgiveness programs that you weren’t previously eligible for.
For example, if your federal loan is through the Federal Family Education Loan (FFEL) Program, you don’t qualify for the Public Service Loan Forgiveness (PSLF) program, and you can only choose one of the four income-driven repayment (IDR) plans. But if you consolidate your FFEL Loans with a Direct Consolidation Loan, you’ll have access to PSLF and all four IDR plans.
Also, parents can consolidate their Parent PLUS Loans and get access to Income-Contingent Repayment.
Student loan consolidation through the federal government can also allow you to extend your repayment period from 10 years to up to 30 years, depending on your loan balance and the payment plan you choose.
Lastly, it resets the clock on deferments and forbearances you’ve already taken on your current loans. “Federal loans have up to three years of deferments and forbearances for things like economic hardship and unemployment,” said Mark Kantrowitz, a student loan expert. “If you consolidate your loan, that’s a new loan with a new set of deferments and forbearances.”
While federal student loan consolidation offers some benefits, saving you money isn’t one of them. “With federal consolidation, you’re not actually changing the cost of the loan,” said Kantrowitz. “The new loan has an interest rate that’s based on the weighted average of the interest rates on the loans that you’re consolidating, rounded up to the nearest one-eighth of a percent.”
As an example, let’s say you have the following loans:
- Loan A: $10,000 balance, 4.50% APR
- Loan B: $15,000 balance, 5.25% APR
- Loan C: $7,500 balance, 6.00% APR
Your weighted average interest rate for these three loans is 5.19%, which would be rounded up to 5.25% for your new Direct Consolidation Loan. This means that in most cases, you’ll end up paying more interest over the life of the new loan if you consolidate.
And while consolidating through the Department of Education resets the clock on deferments and forbearances, it does the same thing to your progress toward loan forgiveness through PSLF and IDR plans.
Private student loan refinancing
Instead of consolidating through the federal government, you can choose to refinance your student loans through a private lender.
“With a private consolidation loan, it’s a new loan with a new interest rate based on your current credit score and the credit score of a cosigner if any,” said Kantrowitz.
If you or your cosigner’s credit score isn’t good enough, though, you might not qualify for a lower interest rate than what you’re currently paying.
The biggest benefit of refinancing your student loans is the possibility of scoring a lower interest rate. Student loan refinancing lenders typically offer both fixed and variable interest rates to give you more options. If you can get a lower interest rate, you could end up paying off your student loans faster and with less interest.
For example, let’s say you just left school and will be paying an average of 5.25% on $30,000 worth of federal student loans over a 10-year period. You check your rates for refinancing and get a fixed rate of 4.00%.
If you remained on a 10-year repayment plan on the new loan, you’d save $2,177 in interest over your repayment period.
As with federal student loan consolidation, you’ll also be able to reduce the number of monthly payments you have to keep track of. Plus, you’ll usually have a few repayment terms from which you can choose, giving you even more flexibility as you pay down your debt.
If you think you’ll want to take advantage of IDR plans and PSLF, refinancing your federal student loans isn’t a good idea. That’s because there’s only one major student loan refinancing company that offers an IDR plan: the Rhode Island Student Loan Authority. No major student loan refinancing companies offer student loan forgiveness.
Another drawback to refinancing is the credit check requirement. If your credit and income aren’t in good shape, you might have a hard time getting approved. Of course, you can get a cosigner. But it can be tough to convince someone to cosign long-term debt, even with the small possibility of getting removed from the loan at some point in the future through a cosigner release program.
How to consolidate your student loans
If you’re considering refinancing your student loans, start the process by comparing several student loan refinancing companies. You’ll be able to see what rates and benefits they might offer you. And while private lenders don’t require a hard credit check to show you tentative rate offers, they will check your credit when you officially apply.
If you’d rather consolidate your federal loans through the Direct Loan Consolidation Program, you can start the application process on the Federal Student Aid (FSA) website. To apply, you’ll need to log in to your FSA account and provide the following information:
- Permanent address
- Email address
- Phone number and the best time to reach you
- Information about your current federal loans
- Your adjusted gross income from your latest tax return or documents proving your current income
Applying for the Direct Loan Consolidation Program is free, and the application process takes about 30 minutes. During the process, you’ll select a consolidation servicer, which will be your point of contact until you get a final decision. Approval isn’t immediate or guaranteed, so keep making payments on your current loans until you hear back from the servicer.
Should you try student loan consolidation?
There’s no guarantee that student loan consolidation will help you, but it’s worth knowing what your options are and how they can help you with your student loan repayment.
If you have federal student loans and want to get or retain the benefits of the Direct Loan Program, consolidating your loans through the Department of Education might be a good idea.
But if you don’t plan on taking advantage of federal student loan benefits and have great credit and income (or a cosigner who does), you might want to try refinancing to see if you can get a lower interest rate on your loans.
Whether you choose to consolidate or refinance your student loans, be smart about how you do it, especially if you have some loans with low rates and others with high rates.
“If you have high interest rates and low interest rates and the interest rate you get with refinancing is between those,” said Kantrowitz, “it makes sense to refinance the higher-rate loans and leave the others with a lower interest rate.”
And if you’re planning on consolidating, Kantrowitz recommended leaving higher-rate loans out of the consolidation process. That way, you can target them for faster repayment. “If you pay off the higher-interest loan in a few years, you may be saving more than you would if you consolidate,” he said.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|