Students face numerous myths when it comes to college. One specific myth declares that you can’t consolidate your federal and private student loans. Although consolidation was not an option for decades, the ability to consolidate student debt is now on the table for college students looking to maximize the financial benefits for both types of student loans.
You can’t use the federal loan consolidation program to consolidate private and federal student loans, but you can work with some private lenders to combine the two groups. You apply for a new loan with a private lender that pays off the current loans, after which the private lender attaches a different interest rate on your consolidated student loan that reflects a balance between what the federal government charges and the interest charged by the private lender.
Why You Should Consider Federal Student Loans
Federal student loans offer several advantages for students who choose not to apply for financial relief at private lending institutions; chiefly, that the government may subsidize the interest on a federally issued student loan. With the government making up for the interest, all you have to worry about is reducing the loan principal. Virtually every type of federal student loan includes a fixed interest rate, which allows you to predict future financial obligations and budget your monthly expenses. Federal student loans limit the amount of money that you pay each month to pare down the debt.
This is an especially important advantage for recent graduates who have not come close to reaching their peak earning potentials. If you choose to pursue a public sector career, the government may forgive your federal student loan after 10 years. Borrower protections include delayed payments, discharge upon borrower death, and discharge for incurring a permanent disability.
But What About Private Student Loans?
You can apply for private student loans from banks, credit unions, or other types of private lending institutions. Many private student loan lenders are now offering student loan refinancing interest rates below federal government rates. Your interest rate and principal amount depends on your credit history. Many students must have a co-signer to ensure approval of private student loan applications.
Private student loan lenders typically offer both variable and fixed interest rates. Variable interest rates make these loans a double-edged sword. On one hand, rising rates can unexpectedly put you tough spot. On the other hand, declining interest rates allow you to defray more of the loan principal. Some students opt for private student loans because, unlike federal student loans, private lenders can’t garnish wages without a court order. The federal government has the power to withhold tax refunds and Social Security checks for delinquent federal student loans.
How to Consolidate Your Federal and Private Student Loans
Have you reached the point of frustration caused by managing several student loan payments offered by different lenders? If so, you can follow a few easy steps to consolidate your federal and private student loans. Organize your application information ahead of time to ensure that you spend no more than 30 minutes applying for student loan consolidation.
There are a couple of options when it comes to student loan consolidation. The most potentially beneficial (and hardest to qualify for) is student loan refinancing with a private lender. With a successful refinance loan application, you can consolidate federal and private student loans together, and you’ll receive a new interest rate and repayment term. If you’re highly qualified for refinancing, then you’ll get an interest rate that may be pretty low.
The other alternative is a federal consolidation loan. This works in a similar fashion as student loan refinancing, but there are fewer benefits and it’s easier to qualify for. Basically, you can apply for a consolidation loan through the Federal government. After a successful application, you are left with just one loan, paying off the previous student loans. Only federal student loans are eligible for this. This new loan comes with an interest rate that is a weighted average of all previous loans, so by definition, it won’t be a reduced rate.
Why Should You Consolidate Federal and Private Student Loans?
Well, to save money, of course. Consolidating federal and private student loans typically reduces the amount of interest you pay each month. Remember, you have to pay off the interest before the reduction in principal kicks in on the loan package. Many college students combine both types of student loans and use the saved interest for whittling down the principal balance.
Another reason to consolidate your loans is the simplicity of tracking one payment from month to month instead of two or a dozen, reducing the amount of time you have to spend every month calculating budgets and monitoring multiple sites to check your student loan balance. Lastly, by consolidating your student loans you may be able to lower your monthly payment by extending your term length. In the process, freeing up some additional spending money.
When You Should Do Nothing
Sometimes, the best student loan strategy is to do nothing. Many federal student loans provide borrowers with benefits and protections that don’t carry over to private lending institutions. If borrower protections and loan benefits matter more to you than the interest rates, then you should stick to the federal route when financing your college education.
However, don’t assume federal student loan rates fall below private student loan rates. With current student loan interest rates at near all-time lows, you can find private lenders that match or beat federal student loan borrowing rates.
Author: Dave Rathmanner
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