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Student Loan Consolidation: Everything Borrowers Need to Know
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Student Loan Consolidation: Everything Borrowers Need to Know

Conquer your student debt. Refinance now.

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Student loan consolidation is one of the best ways to drastically reduce the overwhelm of student loan bills. That’s because it both simplifies your monthly payment and can reduce that payment by up to hundreds of dollars each month. According to one analysis by CNBC Select, the average student loan borrower is likely to save between $4,000 and $7,000 over the lifetime of their loan if they qualify for private student loan consolidation.

Applying for student loan consolidation isn’t difficult. However, there’s more than one way to consolidate your loans, and each has distinct advantages and disadvantages. This guide contains everything you need to understand the two types of student loan consolidation—and help you decide which option is right for you.

What is student loan consolidation?

Student loan consolidation is a process that combines multiple student loans with different rates and term lengths into a single loan.

There are two main ways to consolidate your education loans.

  • Federal student loan consolidation: Getting a new Direct Consolidation Loan from the U.S. Department of Education for federal student loans.
  • Private student loan consolidation: Refinancing your student loans with a private lender.

What is federal student loan consolidation?

Federal student loan consolidation blends all of your existing federal loans into one new loan with a term ranging between 10 and 30 years. With federal student loan consolidation, you will have only one loan payment due to one loan servicer each month with a new fixed rate. Here’s more on how it works.

Consolidate your federal loans

When you’re approved for a federal loan consolidation, the government pays off all your federal student loans. Those old loans disappear. They’re replaced with a single new loan, called a Direct Consolidation Loan.

When you apply for a Direct Consolidation Loan, there’s no origination fee. However, it’s important to note that any private student loans you have cannot be consolidated with a Direct Consolidation Loan. That’s because Direct Consolidation is a federal loan program intended to help borrowers simplify their federal student loan payments. If you want to combine a mix of federal and private loans, you’ll have to pursue private student loan consolidation instead.

Access government repayment programs

Going the federal route for student loan consolidation has a few major benefits. For one thing, it makes you eligible for a number of government-sponsored student loan repayment programs. Here are a few of the big ones.

Public Service Loan Forgiveness

The Public Service Loan Forgiveness (PSLF) program is one route to loan forgiveness for teachers, government employees, and anyone who works in the nonprofit sector. Basically, it cancels the remaining balance of your student loan debt once you’ve made 120 payments while working for an eligible employer. It’s also one of several programs available to military service members. Unfortunately, PSLF isn’t available for all federal education loans. However, federal Direct Consolidation Loans do qualify.

Income-driven repayment plans

These programs adjust your monthly payment to an amount that corresponds to your income. Many of the government’s income-based repayment plans are only available to those with either Direct Loans or federally consolidated loans. (You have to consolidate parent PLUS Loans, for example, to qualify for income-based repayment.)

Deferment and forbearance

Both deferment and forbearance put a temporary pause on loan payments. These protections are available for all federal education loans. Even if you do a federal student loan consolidation, these benefits remain at your disposal.

Get a single fixed interest rate

One of the hardest parts of paying back several different lenders is keeping track of all your statements, repayment terms, and interest rates.  With consolidation, though, you pay only one lender with a single fixed interest rate.

Keep in mind, though it makes paying your loan easier, direct student loan consolidation does not save you any money. Your new interest rate with a direct consolidation loan is simply a weighted average of your existing rates.

This means that your interest rates will be more or less averaged together, with the resulting rate leaning more heavily toward that of your bigger loans. Try using a weighted interest rate calculator to get a feel for what your post-consolidation rate will be.

Note: Keep in mind that your final weighted interest rate will be rounded up to the nearest one-eighth of 1%. If the calculator shows you a 5.67% weighted interest rate, for example, that will translate to a post-consolidation rate of 5.75% when all’s said and done.

What is private student loan consolidation?

Like federal loan consolidation, private student loan consolidation (also known as student loan refinancing) allows you to combine multiple student loans into one loan. Unlike federal loan consolidation, however, private student loan consolidation offers more flexibility. Here’s how.

Consolidate both federal and private loans

Private student loan consolidation allows you to consolidate both federal loans and private loans. When you do this, the private lender pays off all your old loans for you and gives you a single new loan. Not everyone qualifies for private student loan consolidation, but if you have a good enough credit score and strong financial footing, it can provide some major perks.

Unlike with federal student loan consolidation, refinancing can help you save money over the lifetime of your loan. That’s because it lets you use your credit score, savings, and job history to prove you’re good for your debt—which can help you secure a lower interest rate and shorter repayment term without incurring prepayment penalties.

Lower your monthly payments

With private student loan consolidation, you are not only consolidating your loans, but also getting a new loan term and interest rate that depend on your current financial profile. This new interest rate can reduce your interest payments significantly over your repayment period.

You may also be able to choose between a variable or fixed interest rate. And if you originally needed a cosigner on your loans, you may be able to release them of their obligation when consolidating.

Renegotiate your repayment terms

Other than a new interest rate, refinancing also offers a variety of repayment terms, giving you some choice in how much you pay each month.

If you want to free up money in your budget with lower monthly payments, you can do that by choosing to make payments over a longer period of time. If you want to pay off your loan more aggressively with a shorter loan term, you can do that as well.

Student loan consolidation: pros and cons

Before you consolidate or refinance your student loans, be sure to weigh the benefits and drawbacks.

Pros of student loan consolidation

  • Simpler bills. With a single loan to worry about, your monthly payments will be simpler and easier to manage.
  • Reduced monthly payments. Consolidation can lower your monthly bill by extending your repayment term or giving you a lower interest rate.
  • Release a cosigner. Consolidating can also allow you to release a cosigner and take on the full responsibility of your loans.
  • Work with a new loan servicer. Student loan consolidation lets you choose a new loan servicer—a big bonus if you’re not happy with your current servicer
  • Get out of default. If you’ve defaulted on a loan, federal loan consolidation can provide one avenue to getting back on track.
  • Get a fixed interest rate. Consolidating can replace your variable interest rate loans with a single, new loan with a fixed interest rate. That means your new payment won’t change over time.

Cons of student loan consolidation

  • You could pay more. If you extend your repayment term, you’ll likely pay more in interest over the life of the loan.
  • Your principle could increase. When you consolidate, any unpaid interest on your individual loans becomes part of the principal of the new, consolidated loan. That leaves you with a bigger balance to pay interest on.
  • You could lose emergency protections. Federal loans come with generous deference and forbearance options, and a post-graduation grace period. By choosing to consolidate under a private loan servicer, you forfeit those failsafes.
  • You give up other benefits. Federal loans come with perks—like Public Service Loan Forgiveness (PSLF), Perkins Loan forgiveness, or income-driven repayment options—that you could lose after consolidation.
  • You might lose credit toward forgiveness. Consolidating could reset any progress you’ve made toward loan forgiveness plans like PSL.

Private student loan consolidation vs. federal: Which is right for me?

Private student loan consolidation will be a smarter choice for some people, while federal student loan consolidation will better suit others. It all depends on your financial situation, credit history, and the types of loans you have.

Private student loan consolidation could be better for you if…

  1. Your student loans are from private lending companies, or you have a mix of private loans and federal student aid.
  2. You aren’t serving in the military, working as a teacher, or working a nonprofit or government job that could qualify you for federal loan forgiveness programs.
  3. You don’t expect to apply for forbearance or deferment for your federal student aid.
  4. You have a good credit score (in the high 600s or higher).
  5. You have a solid job and good financial footing.

Federal student loan consolidation could be better for you if…

  1. You only have federal student loans.
  2. You work for a government organization or nonprofit and qualify for Public Service Loan Forgiveness or other federal forgiveness programs.
  3. You can’t afford your current monthly payment and think you might qualify for income-based repayment options.
  4. You don’t have an amazing credit score or a stable job situation.
  5. You’re in student loan default and want a faster alternative to loan rehabilitation.

Alternatives to student loan consolidation

Student loan consolidation doesn’t work for everyone. If you don’t have a fair to excellent credit score (many private lenders require a score of at least 650), or you’re struggling to make your current payments, consider these alternatives.

  1. Deferment. If you’re between jobs, going back to school, or dealing with financial or medical hardship, you might be able to hit pause on your federal student loans (and interest accrual) by applying for student loan deferment.
  2. Forbearance. Student loan forbearance is similar to deferment, except you’ll have to pay all the interest that accrues during the forbearance period. You also can’t get forbearance for more than a year at a time.
  3. Income-driven repayment plans. If you can’t afford the monthly payment on your federal student loans, you may be able to apply for income-driven repayment plans without consolidating first.
  4. Student loan settlement. If you default on your loans, you can try contacting your servicer to negotiate new terms of payment.
  5.  Keeping your current plan. If you don’t qualify for private student loan consolidation, don’t want to extend your repayment term, or don’t want to lose the benefits of certain federal loans, it might make sense to stick with your current plan. You can always work toward improving your financial situation and qualifying for refinancing later.

How do I begin the student loan consolidation process?

Student loan consolidation can take one to two months, so it’s best to start the enrollment process as soon as you’re sure you want to consolidate. The processes differ for federal and private consolidation.

How to begin a federal student loan consolidation

You can apply to consolidate your federal loans online through the Department of Education.

  • Gather your documents. Go to studentloans.gov and check out the “What do I need?” section. Get everything together before you begin.
  • Start your loan application. Log into your studentaid.gov account to begin the “Federal Direct Consolidation Loan Application and Promissory Note.”
  • Pick your plan. First, choose the loans you want to consolidate. (Note that if you have some loans with unique benefits—like a Perkins Loan you think you could get forgiven—you can leave those out.) Then, use the Department of Education’s Loan Simulator tool to help you compare plans before you choose one.

How to begin a private student loan consolidation
The first step to refinancing your student loans is researching your options.

  • Shop around to get rate estimates. Different private loan servicers offer different interest rates. To see what each can offer, apply for pre-qualification for as many servicers as you can. (Pre-qualifications use what’s called a “soft credit pull,” which doesn’t hurt your credit score.)
  • Compare annual percentage rates. Comparing annual percentage rates, or APRs, is the best way to compare consolidation offers. That’s because the APR includes the interest rate as well as other fees—giving you a more complete picture of the total cost of the loan. The lower the APR, the better.
  • Consider other perks. APR is important, but it isn’t everything. Some loan servicers offer a kind of signing bonus, called a “student loan refinance bonus,” to entice your business. Others let you choose your own repayment term. Before you pick a private loan servicer to consolidate with, look at all these factors. Then, use a student loan refinance calculator to make sure you’re saving the most money possible over the lifetime of your loan.
  • Complete your application. When you’ve settled on a servicer, apply for approval. (Note that this will trigger a “hard credit pull,” which impacts your credit score, so only apply for one servicer if you can help it.)

Find out how much you could save with Earnest

While federal loan consolidation can offer great benefits to certain borrowers, it won’t save you money over the lifetime of your loan. Private loan consolidation or refinancing, on the other hand, may save you money by getting you a reduced payment term and lower interest rate. To see how much you could save by refinancing with Earnest, do a free rate check online. It only takes two minutes, it won’t affect your credit score, and, who knows? It could be your first step to saving thousands on your student loans.

Conquer your student debt. Refinance now.

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.