This post is from FMF contributor Antonio Williams.
Getting a degree is more expensive than ever. Many college and graduate students are required to take out student loans in order to finance their education. The average debt per borrower for undergraduate students rose to new heights in 2016, and the record gets broken every year. For graduate students, the number was even higher, at $57,600. Many borrowers have multiple loans, leaving them struggling to pay several bills each month on top of their other financial obligations.
For many graduates, there are plenty of things they can do to help themselves. Loan consolidation or refinancing may be an option to combine many loans into a single loan. For private student loans, it may also be a way to obtain a lower interest rate or convert a variable interest rate loan to a fixed interest rate student loan. For federal student loans, consolidation can be a tool to help you stay on top of your student loan payments.
There are two different types of consolidation: federal and private. Federal student loan consolidation involves a specific process through the United States Department of Education where multiple federal student loans are combined into a single federal student loan. It can only be used for federal student loans — not private loans — and typically will not result in a new, lower interest rate. Instead, the interest rate for a federal loan consolidation is based on a weighted average of the old loans’ interest rates.
The primary benefit of federal student loan consolidation is that it results in a single monthly payment. In addition, borrowers may be able to extend the repayment of their loans, lowering their monthly payment. They may also be able to switch to an alternative repayment schedule or move from a variable interest rate loan to a fixed rate loan. However, changing the length of a loan repayment schedule will result in paying more over the life of the loan. For example, by extending the payment term from 20 to 30 years, a borrower could pay thousands of dollars more in interest even with the lower monthly payment. Consolidating federal loans may result in losing certain borrower protections that only apply to specific federal loans, such as interest rate discounts or loan cancellation benefits. Carefully consider the advantages and disadvantages of federal loan consolidation before deciding to consolidate. You may be eligible for deferment or forbearance if you are struggling to make your payments. This may be a better option for some borrowers than consolidating your federal student loans.
If you do decide to consolidate your federal student loans, go directly to the Department of Education’s website. Never respond to pop-up ads, letters, or email solicitations about consolidations; it is free through the government, and you should never be charged a fee. Once you are on the site, simply log in with the identification that you created to apply for your student loans. Then complete the application form, choose a repayment plan, using the repayment estimator to see how much you will pay each month. You can then choose your new loan servicer from the list of available options. You will then receive a statement from this new servicer, and will make your payments directly to this company.
Private loan consolidation is also known as student loan refinancing. This process involves applying for a new student loan, which is then used to pay off your existing student loans. Private loan consolidation can be used for both private and federal student loans, or just private student loans. The main benefit of private student loan consolidation is to obtain a lower interest rate, usually based on a better credit score, a higher income, a history of on-time payments, or other factors. Private loan consolidation may also be used to switch a variable rate loan to a fixed interest rate loan.
Refinancing or consolidating private loans often saves borrowers money through lower interest rates, or by going from a variable interest rate to a fixed interest rate. A refinanced private loan involves an entirely new interest loan based on the borrower’s application and creditworthiness. This generally means a lower monthly payment. Typically, repayment terms for a private loan consolidation are shorter, from five to twenty years, which means that private loan consolidations allow borrowers to pay off their debt more quickly. However, if borrowers consolidate both private and federal student loans together, they will lose the benefits of federal student loans, such as income-based repayment options, deferral, loan forgiveness and more. If you are considering refinancing your private student loans, think twice before consolidating your federal student loans with your private student loans.
If you decide to refinance your private student loans, you should begin by examining your student loan servicing documents to determine if it makes financial sense to consolidate your loans. You can obtain this information directly from your lenders by requesting a free copy of your credit report from one of the three major credit reporting agencies. These documents will list your outstanding student loans, including the companies that hold them. Once you have these documents, you can then use online calculators to determine if you will save money by refinancing your student loans. Online sites such as LendEDU will then allow you to compare a number of lenders based on their interest rates, terms, rank and other factors so that you can make the best possible decision about which lender to choose for your student loan refinance.
Apply for a private student loan consolidation directly with a lender; as with federal student loan consolidation, it typically will not cost you any money. Your eligibility for refinancing will be based on your creditworthiness and oftentimes your projected income. Generally, your credit score must be at least in the mid-600’s to qualify for refinancing. The higher your credit score and other indicia of creditworthiness, the lower your interest rate will be. According to Investopedia, there are five major factors that determine our credit score.
Whether you are consolidating private or federal student loans, consolidating your debt can help you organize your finances and may save you a significant amount of money on your student loans. Carefully consider all aspects of consolidation before you make the decision to make sure that you are making the best choice for your finances!