Do you find yourself asking “Should I consolidate my student loans?” There are many reasons for and against consolidating student loans, and we will discuss them all in-depth below. First, let’s focus on whether you should consolidate your private student loans.
Should I Consolidate My Private Student loans?
If you have good credit, a stable job and have already made at least a few student loan payments, you are a good candidate for refinancing and consolidating your private student loans, because you can probably get a better interest rate than you are currently paying.
Credit History For Consolidating
Right now, if you have good credit history, you can refinance and consolidate student loans at around 3% If that does not describe your situation, you may still be able to refinance and consolidate your private student loans if you have a cosigner with a good credit history. Before asking someone to cosign for you, however, find out how likely it is that they can be released from their obligation to repay your student loans when your credit improves. It is usually difficult to convince a private lender to release a cosigner. Of course, if you consolidate all your private student loans, you will have just one monthly payment for them, which can be easier for many people to manage than paying on several loans every month.
How Much Money Will Consolidating Save You
To answer the question, “Should I consolidate my student loans,” you need to have a good idea how much you could save. You can find this out easily and quickly by using our student loan refinancing calculator. You simply input your current student loan balance, your average interest rate and your loan term and then do the same for the new interest rate and loan term. Our calculator will immediately tell you your approximate savings and monthly payment. Say, for example, you currently have a balance of $25,000 at an average of 7% over 10 years. If you refinance and consolidate at 3% for the same term, you will save $5,864.32 and your monthly payment will be $48.87. Of course, many people refinance and consolidate in order to pay off their student loans in a shorter time period.
The key to whether or not you should refinance and consolidate your private student loans is whether or not your credit history (or that of your cosigner) will enable you to get an interest rate that is low enough to save you significant money and possibly also pay off your loans earlier if that is one of your goals. Paying off your loans earlier in addition to getting a lower interest rate will save you quite a bit of money.
Should I Consolidate My Federal Student Loans?
There are two ways to consolidate your federal student loans. One is through a Federal Direct Consolidation Loan and the other is with a private lender.
Student Loan Consolidation through a Federal Direct Consolidation Loan
A Direct Consolidation Loan enables you to consolidate multiple federal student loans so you have only one monthly payment. There is no fee to do this, but your interest rate may be rounded up to the nearest 1/8th of a percent. You can apply for consolidation on the studentloans.gov website. Most federal student loans may be consolidated, but Direct Parent PLUS Loans cannot be consolidated with federal student loans given to the student.
Advantages of Federal Direct Consolidation Loans
There are both advantages and disadvantages to Federal Direct Consolidation Loans. On the plus side, you can simplify your life by consolidating all your federal student loans into one payment. You could also increase the period of time for repayment in order to lower your monthly payments. If you have loans that are not Direct Loans, consolidation may grant you access to income-driven repayment plans and the Public Service Loan Forgiveness program. Finally, if you have a variable rate and would like to change to a fixed rate, Federal Direct Consolidation Loan will enable you to do that. There is no credit requirement for federal student loan consolidation.
Disadvantages of Federal Direct Consolidation Loans
On the minus side of the ledger, if you consolidate, you might end up paying more in interest, because usually consolidation increases the repayment term. Be aware that you are only consolidating your student loans through a Federal Direct Consolidation Loan. You are not refinancing them. Your interest rate will be a rounded up, weighted average, and it’s not going to be better than your current rate. You might also lose some benefits that you had with your original federal student loans, such as interest rate discounts, principal rebates or some loan cancellation benefits. If you are already making qualifying payments toward the Public Service Loan Forgiveness program or are on an income-driven repayment plan, you will lose credit for the payments you have made and have to start over. For example, for your student loans to be forgiven under the Public Service Loan Forgiveness program, you must make 120 payments. If you already made 30 and you consolidate, you will lose credit for those 30. Finally, once you consolidate your loans, there is no going back. Your federal student loans are paid off and only the Direct Consolidation Loan remains.
Best Reasons for Federal Loan Consolidation
So, should I consolidate my student loans? These are good reasons to get a Federal Direction Consolidation Loan:
- Need to consolidate to be eligible for an income-driven plan for any reason including to try to get out of student loan default
- Need to consolidate to be eligible for the Public Service Loan Forgiveness program
- Want the convenience of a single payment
Consolidating Federal Loans With a Private Lender
Generally, it’s wise to consider consolidating your federal student loans with a private lender if you have a stable job, with a stable income, and you do not believe you can benefit from any of the student loan forgiveness programs. For borrowers with financial stability as well as a good credit score, often the borrower will save many thousands of dollars by reducing their interest rate with a private student loan lender. Federal student loans interest rates are determined by Congress and are not dependant on your credit score. With the low-interest rates that have been around for a decade now, the rates charged for student loans by the federal government are much higher than whats offered in the private market. Consolidating your federal student loans with a private lender could save thousands.
Federal student loans offer many more protections to the borrower than private student loans. Federal student loans offer options for deferment and forbearance that allow you to temporarily stop making payments or reduce your monthly payments for a period under certain circumstances such as military service or financial hardship. There are also programs where you may be able to have all or part of your federal student loan forgiven or discharged. These include the Public Service Loan Forgiveness program, the Teacher Loan Forgiveness program and death and disability discharges. Also, if you are having trouble repaying your student loans, you can take advantage of income-driven repayment programs. Though some private lenders are more lenient than others, none offer the same repayment options and flexibility of federal student loans. You may be able to refinance and consolidate your federal student loans at a lower rate with a private lender. But unless you have a crystal ball and know absolutely that you will not need the flexibility of federal student loan repayment and forgiveness programs, it is generally better not to refinance federal student loans with a private lender.
Should I Consolidate My Student Loans?
In a nutshell, it can be very advantageous to consolidate private student loans if you can refinance them at a significantly lower rate at the same time. It can also be advantageous to consolidate your federal student loans via a Federal Direct Consolidation Loan if doing so gives you access to programs that will forgive some of your debt or offer you a more agreeable repayment plan. You do need to be aware that you could lose other protections by doing so. Consolidating your federal student loans with a private lender, however, is not usually recommended even if you can get better interest rates, because you must give up significant repayment options and advantages offered by federal student loans. You must carefully look at your own situation and weigh all the factors.