As a result of several semesters in school or from having student loans from various sources, many graduates find themselves paying several loans on a monthly basis. Each of these loans may come with their own rates, terms, and required monthly payments, making the entire process a bit unwieldy at times.
Student loan consolidation is a way for borrowers to simplify the repayment process by replacing multiple loans with one single loan. And while “simplifying” sounds ideal, it’s important to realize that consolidation isn’t for everyone, and in some cases, it can adversely affect repayment.
To make things even more confusing, there are multiple kinds of student loan consolidation.
The government offers a Direct Consolidation Loan that can be used to combine multiple federal student loans into one new federal student loan. Alternatively, private lenders offer private student loan consolidation and refinancing that can be used to combine federal and/or private loans together into one new private student loan.
How Federal Student Loan Consolidation Works
Consolidation, or the combination of two more loans into a single loan, is available for most federal loans. The result will be one new federal student loan.
If you have federal student loans and are thinking about consolidating, it’s important to keep the following in mind:
- Federal consolidation rates are based on the weighted average of all individual loans rates included in the consolidation, rounded up to the nearest eighth of a percent. This means your new rate will likely be slightly higher, on average, as compared to your previous loans.
- When consolidating, you will have the choice to extend your repayment term up to 30 years. This may lower your monthly payments, but will also increase the amount of interest you pay over the life of the loan.
- Borrowers consolidating loans other than Direct Loans may find that consolidation makes them eligible for plans, like Public Service Loan Forgiveness and income-driven repayment plans, which they may have not been previously eligible for.
- Conversely, if you’re already enrolled in those plans, consolidation will negate any prior credit you have towards time served (i.e., if you are 10 years in to a 25-year income-based repayment, your counter will restart at consolidation).
How Student Loan Refinancing Works
The federal government does not offer refinancing options for federal loans. However, eligible borrowers have the option to refinance federal loans (as well as private loans) through private lenders.
Working with a private lender to refinance your federal loans does have some perks. For example, if you have good credit, a low debt-to-income ratio, a strong history of employment with consistent income, you may find that refinance rates are considerably lower than your current federal or private rates.
As such, refinancing through a private lender can make payments more manageable and decrease the amount of interest you would have paid otherwise.
Unfortunately, refinancing loans, specifically federal loans, can also void any benefits and protections you had while under your federal loan agreement. These include access to income-driven repayment plans, student loan forgiveness, and deferment and forbearance.
Figuring Out Which Option Works Better for You
Determining which option is best for you depends on your unique situation and what you expect to gain from consolidation, but here’s a few tips:
When Federal Consolidating is Better
- If you currently or plan to take advantage of federal repayment plans or student loan forgiveness. Private lenders are less likely to offer similar protections.
- If your primary goal is to increase the amount of time you have to pay or lower your payments by extending repayment. Federal consolidation can increase the repayment period by up to 30 years; that’s typically not the case for private refinancing.
When Refinancing is Better
- If you have good credit or are considering a cosigner, refinancing may allow you to lock in lower rates – possibly saving you a considerable amount of money.
- If your goal is to consolidate both private and federal loans into one new loan.
- If your loans are currently subject to variable rates and you want to secure a single, fixed rate for all or some of your loans.
- Assuming you meet the requirements as set forth by the lender, refinancing often represents a way to possibly remove a cosigner from your loan.
For borrowers with multiple federal loans, federal consolidation can represent a way to simplify the repayment process while keeping some of the perks offered by the government. However, not all borrowers will benefit from consolidation, with some finding refinancing to be a better option. To make the best decisions, evaluate all your options as well as your current and future repayment needs.
Author: Jeff Gitlen
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