Student Loan Consolidation Explained
Student loan consolidation is the process of uniting some or all of your student loans into one new loan. By consolidating student loans, the borrower would have only one student loan, with one monthly payment, interest rate, and term. People usually consolidate or refinance their student loans to lower and/or simplify their payments.
The Complete Guide to Student Loan Consolidation and Student Loan Refinancing
4 Easy Steps to Student Loan Consolidation (And Everything Else You Need to Know)
Student loan consolidation is the process of combining some or all of your student loans into one new loan. By consolidating, the borrower would have only one student loan, with one monthly payment, interest rate, and term. People usually consolidate or refinance their student loans to lower and/or simplify their payments.
The process of consolidation begins with four easy steps:
- Understand the Difference Between Federal Student Loan Consolidation vs. Private Student Loan Refinancing – Both of these programs can lower your payments but in very different ways. Federal consolidation offers payment flexibility and long-term forgiveness options, while private consolidation can lower your interest rate (thereby lowering your monthly payment as a result). Understanding the benefits and risks of each program will help you decide which one is the better fit
- Understand Your Monthly Payment and Total Repayment – Both consolidation options allow you to go from multiple loans to a single new loan with one payment, one interest rate, one term, and one lender. With federal consolidation, you have the choice of multiple repayment options which can base your monthly payments directly on your income and family size. Your interest rate will be a weighted-average from your previous federal loans. You will also be able to see your total repayment amount at any time with this new loan and enjoy forgiveness of any remaining balance once your term is completed. With private consolidation, a private lender can directly lower your interest rate, thereby making your monthly payments that much lower as a result. They can also increase the length of your repayment term which can make for lower monthly payments (but possibly a larger total repayment once the term is completed). The private lender and program you go with will ultimately decide how your monthly payment and total repayment amounts are affected.
- Determine Your Eligibility – Whether your student loans are federal or private will determine which consolidation programs are available to you. Federal consolidation and forgiveness requires that you have direct federal loans, while both federal and private loans are eligible for private consolidation/refinancing (much more on this below).
- Take Action – Once you understand the differences and benefits of both consolidation programs and your eligibility for either one, the fourth step is to take action and begin the application process.
This article will lead you through these four steps in a very simple and straightforward way so that you have all the answers you need to finally take action! Keep reading below to learn more.
Understanding Federal Student Loan Consolidation vs Private Student Loan Refinancing
Both types of consolidations can lower your payments and reduce the headache of having to keep track of multiple student loans (which can lessen the risk of accidental default), but the similarities usually stop there…
In broad terms, federal student loan consolidation can help create payment flexibility and forgiveness options (provided the borrower enrolls in the correct program) while private student loan consolidation is typically done to get a lower interest rate, thereby lowering your payments (and the total amount paid) as a result. This usually, depends on the rate the borrower got when they first took out their loans and the current interest rates offered for refinancing student loans.
For those with both private AND federal student loans, it’s often very beneficial to do both a private student loan consolidation for their private loans and a federal student loan consolidation for their federal loans. Yes, you can do both!
Now let’s look at the benefits and eligibility requirements for each program.
Federal Student Loan Consolidation:
Federal consolidations are an excellent choice for those looking to lower their monthly payments and pursue long-term forgiveness options. It’s especially helpful for low-income borrowers as payments are based on discretionary income, which in some cases can lead to $0 monthly payments!
Federal consolidations are available to borrowers who have direct federal loans and are no longer in school. Consolidation is done through The William D. Ford Federal Direct Lending Program (known as (Click here to see more. )
Here’s a basic overview of how federal student loan consolidation works:
- A borrower with multiple federal student loans applies for consolidation
- If the borrower is eligible, their loans are then combined into one new consolidated loan with a single payment, interest rate, term, and lender
- The borrower is then able to enroll in an income-based repayment program that includes long-term forgiveness options (Note: federal consolidation sets your payment based on your income, it does not lower your interest rate)
Generally speaking, federal loan consolidations are relatively easy to qualify and apply for (and offer MANY more benefits than private consolidations). They also offer many benefits to cash-strapped borrowers and those struggling with their student loan payments today.
Here’s a list of the many benefits offered by federal student loan consolidation:
- NO credit check required
- Is available to borrowers currently in default on their loans
- Preserves the flexibility of federal direct student loans (with deferment/forbearance and income-driven payment options)
- Extends the term of the loan, allowing for lower payments (and prepayment options with no penalty to keep further interest from accruing)
- Allows borrowers to enroll in programs that set the payment amount based on the borrower’s income (Learn more here). This can keep your payments manageable even if you have low income and provide flexibility should your income be reduced at any point.
- Can remove some borrowers from their current default status (those with wage garnishments are not eligible and must go through student loan rehabilitation first)
- For some borrowers, it allows for eligibility for Public Service Loan Forgiveness (after 120 payments)
- Offers end-of-term forgiveness options for any unpaid loan balance (after 20-25 years depending on the program)
- Allows the borrower to choose their loan servicer (Navient, FedLoan Servicing, Great Lakes, Nelnet)
FAQ – Federal Student Loan Consolidation:
What types of federal student loans are eligible?
Only direct federal student loans can be consolidated under this program.
When can my loans be consolidated?
You are typically able to consolidate after you graduate, leave school, or fall below half-time enrollment.
Will my interest rate change?
Federal consolidation does not lower your interest rate, it simply takes a weighted-average rate of the loans you already have. Because federal consolidation doesn’t change your rate, if you are a highly creditworthy borrower, you may want to consider private consolidation or refinancing.
Will federal consolidation change my repayment options?
Federal student loan consolidation often allows you to extend your repayment term based on your consolidated loan balance. Borrowers are often able to extend their term from 10 to up to 30 years. This may lower your monthly payment (but may also increase the total amount you pay over the longer term).
When will I begin repayment on my consolidated loan?
Repayment on a consolidated loan begins immediately, with most borrowers receiving their first bill within 60 days of approval and disbursement of their newly consolidated loan.
Can I still take advantage of my grace period?
Yes. If any of your current student loans are still within their grace period, you can delay repayment on your newly consolidated loan until your grace period end-date. You can do this by asking the loan servicer of your consolidated loan to delay processing your application until toward the end of your current grace period.
What if I’ve already consolidated my federal student loans?
In this case, you cannot re-consolidate unless you have added another federal student loan to your total loans since then.
Can I consolidate my student loans if I’m currently in default?
Yes, as long as you don’t have a wage garnishment against you. Consolidating your defaulted student loans and enrolling in an Income-Based Repayment plan can be a great way to get a “fresh start” and make your student loan situation much more manageable. Those that have a wage garnishment must first go through rehabilitation before being eligible to consolidate.
By consolidating, can I take advantage of Income-Driven and Forgiveness Plans if I’m eligible?
Absolutely! This is often one of the best reasons to consolidate your federal student loans. Keep in mind though, you are not automatically enrolled into the income-driven plans. You must choose this option when consolidating (or later on) to take advantage of them. Further, not all federal loans are eligible to enroll in all income-driven plans. For example, Parent Plus loans are only eligible for Income-Contingent Repayment (not IBR, PAYE, or REPAYE programs).
Is there an application fee to apply?
There is no application fee for federal student loan consolidation.
Can I apply for federal consolidation online?
Yes, you can apply directly online here.
How can I learn more before I apply?
You can learn more about the federal consolidation process and your options through the Department of Education as well as our federal student loan consolidation page. You can also call 1-844-669-4407 to talk to a company focused on assisting borrowers.
Private Student Loan Consolidation (or Refinancing):
Private consolidation/refinancing is a great option for someone looking to lower their interest rate and thereby their payments (and the total amount paid) going forward. Unlike federal consolidation, private consolidation can be done for both private and federal student loans.
A private consolidation is a great option for borrowers who already have a high-interest rate on their student loans. By consolidating or refinancing at a lower rate, the borrower can enjoy significant savings over the term of the loan. These lower rates can be available to borrowers for a variety of reasons:
- Interest rates have come down since the borrower took out their loans
- The borrower has become more creditworthy since graduating (has higher income, better credit score, etc.)
Here are the basic student loan refinancing requirements:
- Good Credit: Score generally needs to be above a 660
- Good Debt-to-Income Ratio: Generally banks want this to be lower than 40-45%
- Proof of stable income: Typically more than $25k/year
Because the borrower is effectively taking out a new loan from a private lending institution (while paying off the old loan), private refinancing is usually much harder to qualify for. As such, typically those who are eligible for and/or receive the greatest benefit from private consolidation are creditworthy borrowers.
For creditworthy borrowers, private loan consolidations are available through many private lending institutions. Currently, many lenders who offer student loan refinancing are quoting adjustable rates as low as 1.95% and fixed rates as low as 3.75%.
Note: When evaluating your options, keep in mind that once you consolidate your federal student loans into a private loan, you CANNOT take advantage of the Federal Direct program. For borrowers with solid financial stability, this may be fine, but those with less financial stability may want to consider other options.
For more information on private student loan consolidation, click here.
FAQ – Private Student Loan Consolidation:
Am I eligible for private student loan consolidation?
Because private institutions do these, there is no automatic eligibility. Generally, you will be evaluated based on your creditworthiness. If you are behind on your loans, it’s unlikely that you will be eligible.
When can my loans be consolidated into a private loan?
You are typically able to consolidate after you graduate, leave school, or fall below half-time enrollment.
Will this lower my interest rate?
This depends, on your current rate and your credit worthiness. If you have a high rate and a good credit score, you may have a good shot at eligibility. LendKey and CommonBond are just a few of the sites that can help you.
How much does private student loan consolidation/refinancing cost?
It varies depending on which private lender you decide to work with.
If I’m struggling with my private loans, are there forgiveness programs or other ways to reduce my payment?
There are currently no forgiveness programs for private loans, but some law firms specialize in private student loan relief. Student Debt Relief may be able to help you identify those firms that specialize in this area. Click here to learn more about those options or call us for more information at 1-844-669-4407.
A Word of Caution: When consolidating your student loans, be SURE you know which type of consolidation you are doing. There are numerous disreputable/scam companies out there who are consolidating borrowers with federal student loans into private student loans without the borrower understanding the implications of this – which can result in you not being able to take advantage of forgiveness and/or income-based repayment programs!