How to consolidate student loans
Consider consolidating student loans is the right choice if you manage multiple student loans or will be after the payments pause extension ends. While consolidation can be beneficial, there are better choices for some. Here are some things to think about.
What is Student Loan Consolidation?
Consolidation is the combination of multiple student loans into one loan. You are refinancing various student loans into one payment with a new timeline.
What is the best way to consolidate my student loans?
Consolidating depends on two things. First, what type of loans are you currently having, and second, what are your goals for those loans?
Is it federal or private loans? Federal student loans may be combined with a federal Direct consolidation loan. This keeps them in the national loan system.
You can refinance private loans into one personal loan. You can consolidate federal loans into a single private loan. However, you will lose permanent access to federal benefits such as income-driven repayment plans or forgiveness options.
- Do you want a lower interest rate?
- Are you looking to reduce your monthly payments?
- Are you planning to use one of the payment plans that are available for federal loans only (income-driven and public service forgiveness programs),
The pros and cons of consolidating federal student loans
The pros
A smaller monthly payment is often the best benefit. It’s usually just one payment. It can be easier to manage fewer bills each month, which can reduce headaches.
Importantly, if you use Direct Consolidation Loans, you can still be eligible for potential income-driven repayment or forgiveness programs. A consolidated federal student loan can still be eligible for the one-time debt relief package.
The Cons
If you don’t seek forgiveness, you’ll pay more long-term. A Direct Consolidation loan reduces your monthly payments and extends your repayment period. It doesn’t lower interest rates, and it does not reduce your cost. You will pay more interest over the long term in exchange for a lower monthly payment.
Condemnation: If you consolidate all your loans, you may lose certain benefits, such as canceling a Perkins loan. Federal loans may offer interest rate discounts, principal reductions, and loan cancellation benefits. You don’t have to include all eligible federal student loans in a Direct Consolidation loan. You should exclude certain loans that have essential benefits from your consolidation loan.
What type of federal student loans are eligible?
Federal student loans are eligible for the federal Direct Consolidation Loan Program (only one federal program).
Here is a complete list of qualified loans according to studentaid.gov
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans (Grad Plus and Parent PLUS)
- Federal Stafford Loans are Subsidized by the Federal Family Education Loan Program (FFEL).
- Federal Stafford Loans (FFEL) – Unsubsidized and non-subsidized
- FFEL PLUS Loans
- Supplemental loans for students
- Federal Perkins Loans
- Nursing student loans
- Nursing Faculty Loans
- Health Education Assistance Loans
- Student loans for Health Professions
- Student Loans Available to Disabled Students
- FFEL Consolidation Loans or Direct Consolidation Loans. If consolidating a consolidation loan, you must typically add a new eligible loan.
- Federally Insured Student Loans
- Guaranteed Student Loans
- National Direct Student Loans
- National Defense Student Loans
- Parent Loans for Students in Undergraduate Studies
- Assist students with auxiliary loans.
How does Federal Student Loan Consolidation work?
Make sure you are eligible. You can consolidate your loans when you are no longer a student. This means you have graduated, dropped below half-time enrollment, or withdrawn from the college. You should have a grace or payment period for your loans.
You must apply for a Direct consolidation loan to consolidate federal loans. You can submit an online application or by mail (find the instructions for the paper form through this link). Consolidating federal student loans is free. However, it would help if you were wary of anyone who asks for a fee.
You must indicate which loans you would like to apply for and the payment plan you prefer. An additional form will be required if you choose an income-based repayment plan. You should refrain from taking out loans for which you would lose benefits like Perkins loans.
Although you may be allowed to include loans in default, it will require additional steps. To consolidate your loan, you must make three monthly payments or agree to an income-driven repayment schedule.
According to studentaid.gov, a loan agent will manage the consolidation process once you submit your application. Once approved, you will receive a new loan and monthly payment.
Consolidating federal student loans will not lower your interest rate. The new consolidated interest rates will equal the weighted average rate of all your prior rates plus the next 1/8th percentage. However, you can reduce your monthly payment. This is the main reason why many people consolidate.
It would be best if you continued to make timely payments on your original loans until you are approved.
What about refinancing into private loans?
You must find a qualified private lender to refinance federal loans into personal loans. Refinances of student loans have been rare recently. However, many online lenders specialize in refinances of student loans, including Earnest and SoFi. You will lose federal benefits such as Public Service Loan Forgiveness and Teacher Loan Forgiveness.
Qualified private lenders are available to help you consolidate personal loans. A strong credit history is a plus, but you must also show a steady income source. A private refinance can offer you a better interest rate than federal consolidation. This is dependent on your credit score as well as other factors. Current interest rates range from 3.99% to more than 10%. The better your credit score, the better the offers. You can and should shop around for rates because there are many lenders.
Red Flags to Look Out For
Here are some things to keep in mind as you move forward
- Fee for federal consolidating. Federal consolidation is free, so no one should charge you extra.
- Interest rates are too reasonable to be true. Compare current rates and shop around.
- High fees. Shop around again. What is normal?
- Types of lenders Choose those with positive client reviews and high ratings from the Better Business Bureau.
If you have federal loans that you want to pay less, you should check first if an income-based repayment plan is available. Consolidation can lead to higher long-term costs, so ensure you have exhausted all other options.
