One of the many joys of paying back student loans is managing the repayment process. If your idea of fun is managing payments on a number of separate federal and private student loans, then you’re most likely having a bonanza. Most students graduate with a mix of both federal and private student loans. The problem with having so many different loans to manage is that if you are having difficulties repaying you then have to renegotiate your repayment terms multiple times. There are a lot of reasons why some borrowers turn to student loan consolidation and accessing better repayment terms and programs for borrowers facing financial difficulties is one of those reasons. While there are pros and cons to student loan consolidation, it might be right for you.
Private vs. Federal Student Loan Consolidation:
The most important thing to realize is that you can’t consolidate your federal student loans and your private student loans together. You need to consolidate your federal student loans separately in order to keep the benefits you get from them. If you want all your student loans to be held by one private lender, you can potentially refinance your federal student loans and your private student loans but you’ll lose out on a lot of the benefits of federal student loans so it is not often advisable.
Advantages of Federal Student Loan Consolidation:
- Convenience: It is obviously more convenient to have only one federal student loan monthly payment.
- Lower Monthly Payments: By consolidating student loans you’re sometimes able to access repayment plans that allow you to pay a lower monthly rate. These plans extend the length of your repayment over a longer period of years.
- Fixed Rate: For those who borrowed money before student loans switched to fixed interest rates, consolidating your student loans will mean that you will have a fixed interest rate. As we currently have relatively low interest rates, it makes sense for such borrowers to consolidate.
- Slightly Lower Interest Rate: The new interest rate for consolidated loans is a weighted average of all the interest rates on the loans being consolidated rounded to the nearest one-eighth of 1%.
Disadvantages of Federal Student Loan Consolidation:
- You’ll Pay More Interest: If you consolidate your loans to decrease your monthly payment, you’ll pay more interest over the life of your loan.
- Loss of Benefits: You might lose some of the benefits from your original student loan including interest rate discounts, principal rebates and loan cancellation benefits.
How to Consolidate Federal Loans
You need to apply online for a Direct Consolidation Loan via studentloans.gov. You can complete the application online or you can print it out and mail the application in.
Private Student Loan Consolidation
Now that you’ve tackled your federal loans, it’s time to move onto your private student loans. There are different benefits to consolidating private loans although it can sometimes be more difficult to do so. Different lenders have different requirements to qualify for student loan consolidation. Each has a different minimum loan balance to determine eligibility for consolidation, for example. All private lenders will typically look at your credit score and only offer you consolidation options if you have good credit and haven’t missed very many student loan payments.
Advantages of Private Loan Consolidation:
- Convenience: Just like with federal loans, it can be helpful to only have one lender to deal with and one bill to pay.
- Lower Your Interest Rate: As student loans are often given out to students with no credit history, there is a good chance that once you’ve built a good credit history you will qualify for a better interest rate. Also, perhaps interest rates have fallen since you first took out your loan. Consolidation can help you take advantage of this.
- Get a Fixed Rate: If your original student loans had variable interest rates, it might make sense to consolidate to get a fixed interest rate. As interest rates tend to be low at the moment, now is a good time to consolidate if you have a high rate.
- Extending Your Payment Terms: When you consolidate you can choose a longer repayment term for your loan which will decrease your monthly payments.
- Getting Better Repayment Options: You can potentially consolidate your student loans with a loan provider that has more flexibility and programs to help you if you lose your job, make a low-income, or have another issue come up that prevents you from paying your monthly payment for a short or long length of time.
Disadvantages of Consolidating Private Student Loans:
- You will Pay More: Over the life of your loan you will most likely pay more if you extend your loan terms of pay less each month.
- You Might Lose Benefits: Just as getting a new loan provider might allow you access to benefits and repayment options you might not currently have, you could also lose benefits and repayment options you do have. Be sure to check the benefits on your current loan and the consolidated loan benefits.
- Repaying Borrower Benefits: Check the fine print as consolidating your private loans could mean you have to repay certain benefits you’ve already gotten like rebates or fee waivers.
- Losing Your Grace Period: If you consolidate your loans while you’re in your 6 month grace period after graduating, this can often result in you losing your grace period.
- Prepayment Penalties: Some loans have something called prepayment penalties that will require you to pay a lump sum if you pay off your loan early. Consolidating a student loan with another loan provider is the equivalent to your lender of paying off your loan early, so any prepayment penalties in your contract would apply.
Private Loan Consolidation Providers:
Some loan providers to consider when looking for a provider to consolidate your loan are Chase, Student Loan Network, cuStudentLoans, Wells Fargo, CommonBond, and NextStudent. Be sure to look for a provider that does not have origination fees or prepayment fees.