How to Consolidate Federal and Private Student Loans

When talking about college or other forms of higher education, it is commonplace to mention student loans. The cost of attending a university is increasing every year, and student loan disbursements are increasing accordingly. Student loan debt has become a staple issue for students to deal with during college and post graduation. In fact, 7 out of 10 graduates have student loan debt with the average holding around $37,000. 

Since student loans are such a hot topic, it pays to know more about the different types of loans available to students.

Starting with federal student loans, two different types of federal loans are available: subsidized and unsubsidized loans. A subsidized loan is desirable to the borrower because the government makes interest payments while the beneficiary is still in school; a subsidized loan will save money at the expense of the government. On the contrary, an unsubsidized student loan is less desirable because no government interest payments are made which makes the loan more expensive to the borrower.

On the other end, students can receive loans from private institutions as an alternative to federal loans; these loans are formally known as private student loans. There are multiple benefits to these loans. Since they are from private institutions, a competitive market has developed that drives interest rates and loan packages which provides better options overall to the potential borrower. Multiple payment period plans and payment options are available in contrast to the more rigid options offered by the federal government.

Just like there are multiple options to choose from when deciding on a student loan, there are options on how to pay off a student loan. The methods of private refinancing and consolidation and federal consolidation are two ways to take hold of student loans in the search of an easier way to manage debt payments.

Federal Consolidation

The act of consolidating federal loans (private loans are ineligible) is an option offered by the federal government in an effort to simplify the loan payment process each month. The line of thought is simple: one payment versus many payments each month is easier. Although this logic appears sound, there are some considerations to observe before making such a decision.

By centralizing federal student loans, the borrower can simplify the bill each month; additionally, lower monthly payments may result from the payment term options. Consolidation allows for a much longer repayment period of up to 30 years; this lowers the monthly payment rate for the borrower. While this seems beneficial, it is actually a double edged sword when it comes to interest.

When consolidating loans through the government, lengthening the payment period, and lowering monthly payments, the overall interest paid on the consolidated loan versus multiple loans actually increases. A new fixed interest rate is applied to the consolidated loan. This rate is applied to a larger loan amount over a longer time compared to the multiple loans from earlier. The end result of this combination is an overall increase in interest payments made on the overall loan amount.

In addition to raised interest payments, benefits that previously applied to the multiple student loans can be lost after consolidation. Benefits such as interest rate discounts or principal rebates may be nullified for the "new" consolidated loan. The result of this is an increase in amount spent at the end of student loan payments compared to paying off the split up student loans.

Furthermore, the act of loan consolidation is irreversible, so once the move is made, there is no going back. Applications for direct student loans can be made through the government website, StudentLoans.gov.

Private Student Loan Refinancing and Consolidation

While federal student loans can only be consolidated with other federal student loans, both private and federal student loans can be refinanced and consolidated into a new private student loan. When you refinance student loans, you are erasing the previous interest rate and payment term package and replacing it with a new package.

Refinancing loans can apply to a single loan or multiple loans, in contrast to the group consolidation of federal loans. Similar to federal loan consolidation, a different interest rate over an either shorter or longer payment period plan is available to the borrower. This change in interest rate and payment period carries the potential to save money for the beneficiary. In short, the borrower can benefit from a reduced interest rate, which will lead to them paying less over the life of the loan. Alternatively, some may choose to extend their repayment terms, which lowers monthly payments, but also means paying more over the life of the loan.

Private student loan refinancing is a competitive market with companies trying to win over consumers with better interest rates and payment plans. This aspect is in stark contrast to federal student loan consolidation and it benefits the borrower greatly.

The Negatives of Combining Federal and Private Loans Through Refinancing

While these loan alteration options provide ways to save money or lower monthly payments, there are several perks that can be lost when choosing to refinance and consolidate - either federally or privately. One must always keep in mind that consolidation and refinancing is irreversible, so the pros and cons of each must be kept in mind.

As mentioned earlier, consolidating federal student loans nullifies certain benefits, and private refinancing student loans can pose similar risks. There are borrower benefits such as loan forgiveness and loan deferment that are essentially taken away upon loan consolidation or refinancing with a private lender.

Protections are taken away as well. For instance, if the borrower loses a job while paying off a privately consolidated or refinanced loan, there is not much that borrower can do to stall monthly payments. When looking at private loan refinancing, one may benefit by looking into an unemployment protection option.

Federal disability protections are also nullified. If there is an accident that stops income, some loan options provide protections that defer payments until recovery. These protections may be lost when choosing to refinance or consolidate loans with a private lender.

Those looking to bind their incomes to their loan payments can find themselves losing such options after refinancing and consolidation loans. Income-based loan payment options are normally not included for refinancing or consolidation packages through a private lender. Federal student loans, however, are automatically eligible for Income-driven repayment plans.

In addition, those looking to take advantage of federal student loan forgiveness programs also lose eligibility when refinancing with a private lender. It should be noted, however, that these federal programs have very strict eligibility requirements, and most borrowers are not eligible.​

Lastly, there are strict requirements plague anyone trying to refinance a student loan. The borrower typically must be employed with enough savings to cover one month minimum of payments as well as good payment history. Income must be enough to cover the loans as well as daily expenses. There are various other potential requirements; for instance, the loan must be for a Title IV accredited school and for a degree that is completed. There are various other requirements that may potentially bar anyone from receiving refinancing services.

Final Thoughts

Think of it this way: refinancing and consolidating a loan is like starting on a clean slate; this clean slate applies to previous loan benefits as well as previous loan interest rates and payment periods.

While there are certainly cons to refinancing or consolidating loans, sometimes the necessity to alter the loan repayment deal outweighs these negatives.

Choosing to consolidate loans may make things easier deal with, but it seems foolish to extend payments over time which leads to overall increases in interest payment. These consequences cannot be avoided if there is an immediate need to lower monthly payments. Losing benefits is another negative on top of the raised interest debt. Federal consolidation will not save you money.

Private student loan refinancing and consolidation, alternatively, seems much more plausible with its competitive market driving interest rates. The same problems with loan benefits arises. Borrowers who refinance with a private lender will lose eligibility for certain federal protections and programs, though most of these are very hard to qualify for. Overall, private student loan refinancing and consolidation can save borrowers tons of money - just be sure that know what federal benefits you will be losing.