Should I consolidate my student loans? It’s a question almost every borrower asks at least once.
Americans owe $1.48 trillion in student loan debt alone; that’s not including the $620 billion we owe in credit card debt. It’s safe to safe our loans are unaffordable and the amount owed is scary. Loans the size of small mortgages are given out at interest rates that may be two to three times as much as a mortgage interest rate.
Loan consolidation is one of the tools available to borrowers to make their student loan burden more straightforward to manage. It’s an invaluable tool for some, but it only damages other’s financial standing.
What is student loan consolidation and will it help or hurt your finances? Keep reading for our full guide.
What Is Loan Consolidation?
Loan consolidation rolls your existing student loans into one to create a single monthly payment. The process is one of convenience for those who took out loans with multiple providers.
If you owe money to multiple loan servicers, then it’s also likely that each loan features a different interest rate. Because the loans are all shifted to one loan service provider, you’ll only get one interest rate.
Interest rates on consolidated loans are calculated to produce a weighted average. Because your new servicer bought your previous loans, including interest, it’s not in the bank’s interest to give you the best interest rate you qualify for. The weighted average may be – but is not always – lower than the lowest interest rate on your existing loans.
New loans also come with new terms. The new loan term ranges between ten and thirty years from the agreement. Your new terms begin within 60 days of disbursement and are based on your principal balance.
Loan Consolidation vs. Refinancing
Consolidation differs from refinancing in the way the interest rate is calculated. The same process occurs: a new bank buys your existing debt, and you’ll receive a new interest rate. However, refinancing options tend to offer lower interest rates than the original figure.
Refinancing also comes with new loan terms. In exchange for lower interest, you may see inflexible payments or other benefits attached to your loan.
Consolidation isn’t better than refinancing and vice versa. The best option depends on the size and terms of your loan and your finances. Before making any decisions, be sure to consider what loan consolidation would offer you now and in the future.
What Kind of Loans Are Eligible for Consolidation?
Almost all federal loans may be consolidated through a Direct Consolidation Loan offered by the U.S. Department of Education. When you choose a Direct Consolidation Loan, the government pays off the existing loans replaces your current product with the Direct Consolidation Loan.
The following list of eligible is inclusive:
- Subsidized/ Unsubsidized Federal Stafford Loans
- PLUS loans
- Federal Perkins Loans
- Nurse Faculty Loans
- Nursing Student Loans
- Health Professions Student Loans
- Health Education Assistance Loans
- Direct Subsidized/Unsubsidized Loans
- Supplemental Loans for Student
- Loans for Disadvantaged Students
- Direct PLUS Loans
- FFEL Consolidation Loans (under certain conditions)
- Direct Consolidation Loans (under certain conditions)
Check with your federal loan servicer to see if your loans qualify.
Can I Consolidate a Private Loan?
It’s possible to consolidate your private loans. However, you can’t wrap them up with your federal loans.
You have two options:
- Consolidate your two loans separately (federal with the federal program, private with private lenders)
- Consolidate everything with a private lender
Not all private lenders offer federal loan consolidation.
Why can’t I consolidate the two together?
Private loans are ineligible for the low interest rates offered by the government. If you want to combine the two, you will need to do it through a private lender willing to take both.
In most cases, banks refer to private education loan consolidation as refinancing.
What Do I Need to Consolidate My Student Loans?
Student loan consolidation is simpler when you’re working with federal student loans, but both federal and private loans come with a set of requirements.
Federal Student Loans
Federal loan consolidation doesn’t require a particular credit score or payment history. While the lack of credit discrimination makes consolidation accessible to all borrowers, it also means you won’t receive a lower interest rate.
The application for the Direct Consolidation Loan is free and straightforward. Just fill it in through your loan servicer’s website on studentloans.gov. You become eligible once you:
- Graduate from school
- Drop-below half-time enrollment
- Leave school
It’s worth reiterating: the Direct Consolidation Loan is free. Avoid services that request a fee for consolidating federal student loans.
Private loans mean dealing with your bank and it’s individual requirements. Unlike federal aid, banks consider your financial history. Whether refinancing is on the table and the new potential terms depend on:
- Your credit score
- Educational background
- Job history
- Payment history
Banks often require a credit score over 650 to qualify for refinancing. The lowest rate offered hovers around 2%, and the highest may be over 9%.
Want to improve your chances for a better interest rate? Refinancing works best for borrowers who:
- A credit score of 690 or higher
- Regular, on-time payments
- Stable, full-time job
- Co-signer with a job and good credit
Unlike federal loans, private refinancing comes with a fee. These fees depend on the principal balance, lender, and the terms the bank offers. Be sure the cost doesn’t negate any savings you’d receive as a result of the lower interest rate.
You don’t need to refinance your loan through your current lender. There are lenders who dedicate themselves solely to refinancing education loans.
Should I Consolidate My Student Loans?: Questions to Ask
A single, lower monthly payment is attractive. But because you’ll make these payments for the better part of a decade, it’s important to look at both short and long-term pros and cons of consolidation.
Sit down and do the math before signing the dotted line. Here are some questions to get you on your way:
- Will you save money over the short-term, long-term, both, or neither?
- Will consolidation remove current benefits like Public Service Loan Forgiveness?
- Does your credit score warrant an offer for a better product than you currently have?
- Will the consolidation require transferring to a personal loan? Remember: personal loans don’t offer the interest tax benefit.
- Did your original loan servicer offer discounts? Will you keep or lose them?
- How much will service fees add to the principal balance of your loan?
If consolidation removes essential benefits, like forgiveness, without significantly lowering the amount you’ll pay over time, then it might not be for you. The most important outcome is finding a balance that improves affordability today and at the end of your loan term.
What Are the Benefits of Student Loan Consolidation?
The benefits of student loan consolidation don’t apply to every borrower because loans, terms, and financial histories differ.
Here are a few of the benefits:
If you have two or more loan servicers, then a consolidation simplifies your finances by rolling them up into a single monthly payment that’s easy to access.
Longer Term Periods
You may qualify for up to a 30 year term period, which helps lower your monthly payment.
Qualify for an Income-Driven Repayment Plan or Loan Forgiveness
Some people find they don’t qualify for an income-driven repayment plan or loan forgiveness because the balance on their loans is too small. By consolidating the loans, you’ll create one large product with a balance that is more likely to qualify for plans that create a more affordable loan payment.
Transfer to a Fixed Interest Rate
If your original loan features a variable-rate, you may have the chance to transfer to a fixed-interest rate for predictable interest accumulation.
Potential Pitfalls of Consolidation
The pitfalls of consolidation or refinancing also depend on your current loan and financial situations. They include:
Longer Term Periods and Higher Balances
An extended term balance may lower your payment, but you’ll also make more payments and potentially pay more in interest over time.
Loss of Benefits
Consolidation or refinancing may negate the borrower benefits offered by the loan initiator. Read the fine print on your current agreement to look for:
- Principal rebates
- Loan cancellation benefits
- Interest rate discounts
These may be benefiting you more than you think or may kick in sometime in the future. Consider whether the benefits of refinancing or consolidation remove these benefits.
Lose Credits for Payment Plans
If you’re already on an income-driven plan or you’ve received Public Service Loan Forgiveness on a federal loan, you will lose credit made towards those programs upon consolidation or refinancing.
Remember, if you have a federal loan, deferment and forbearance may be better short-term options for affordable payments. If you’re paying back private loans, talk to your bank to learn about the options available with your current loan before refinancing.
Is Consolidation Right for You?
Should I consolidate my student loans? It depends on your loan and your finances.
Consolidation works when it simplifies or lowers your payment without damaging your long-term prospects. Whether it works for you depends on the terms you’re offered and what you owe.
Did you owe payments on private education loans or a combination of private and federal loans? Consolidation or refinancing may be an option for you. Click here to learn more about proactively dealing with your debt.