Student Loan Consolidation: If you are a student who has a federal or private student loan, this may interest you. Juggling multiple loans from different sources can be a big deal, but you don’t have to do it forever.
You can try to consolidate your loans into one large loan. You can do this with either a direct consolidation loan for eligible loans or a refinance loan from a private lender. However, there are pros and cons to consolidating your student loans.
What is student loan consolidation?
Growing up is a way to make student loan repayments more manageable and possibly less expensive. Combine all your student loans, get one large consolidation loan and use it to pay off all the others.
In simpler terms, student loan consolidation simply refers to the process of consolidating many loans into one new loan. Often this new single loan will have a different interest rate or structure, but that depends on what type of consolidation you do.
Should You Consolidate Student Loans?
When considering student loan consolidation, always think about your payments. If you’ve been losing payments because you’re struggling to keep up with multiple loans and multiple repayment dates, consolidation is a viable choice.
However, it’s important to know that if your payments are part of qualifying for any forgiveness program, the clock restarts when you consolidate your debts.
Differences between student loan consolidation and refinancing
The major difference between refinancing and direct loan consolidation are:
- With a refinancing, you negotiate a fixed or variable interest rate that should be lower than what you were paying for each loan individually.
- Refinancing is mainly for private loans and can only be done through private banks, credit unions, or online lenders.
- If you have borrowed from federal and private programs and want to consolidate the entire lot, you can only do so through a private lender.
Student Loan Consolidation: Merit of Direct Loan Consolidation
There are many good reasons to consolidate through the direct loan consolidation program. Are the following:
- One payment.
- Avoid the default.
- Fixed interest rate.
- Lower Payments.
- Multiple repayment plans.
- The deferral/tolerance options increase.
- No minimum or maximum.
- Credit protection.
- Automatic debit.
- Loan discount.
Student Loan Consolidation: Direct Loan Consolidation Demerit
There are two sides to every story and here is the other side to consider before entering the direct loan consolidation program:
- Pay more in interest over time.
- Rounded interest rate.
- No private loan consolidation.
- You lose some advantages.
- Period of “grace” lost.
- The lender’s benefits are gone.
- No makeover.
Comparing Federal Loan Consolidation with Private Loan Consolidation
Federal Loan ConsolidationA federal direct consolidation loan is only available from the Department of Education. You can only consolidate eligible federal loans such as direct loans. And your new interest rate will be a weighted average of your previous loans.
In federal loan consolidation, you repay all existing eligible federal loans with the new direct consolidation loan. Here the fixed rate will be equal to a weighted average of the loans you have consolidated.
Also, you cannot include any private student loans with reference in your direct consolidation loan.
Why Should You Consolidate Federal Student Loans?
When consolidating federal student loans, taking out a direct consolidation loan makes sense if you want to change the way you repay federal student loans.
This direct consolidation loan allows you to change your loan manager if you are not satisfied with the company that currently manages your student loans.
You can also upgrade to a longer repayment plan if you are having trouble keeping up with monthly payments in some cases. This can be up to 30 years.
- Consolidation of the private student loan
Private student loan consolidation allows you to combine multiple federal and private student loans into one new private loan. Like the direct consolidation loan, you will have one new loan to pay off instead of several.
Why Should You Consolidate Federal Student Loans?
This can further simplify student loan repayment. However, if you pay off federal student loans with a new private refinance loan, know that you are forgoing important federal protections and repayment options.
However, unlike a direct consolidation loan, a private consolidation loan allows you to change the interest rate.
Things to Note While Student Loan Consolidation
During the consolidation of student loans we inform you that:
- Reducing the rate should reduce the overall repayment cost.
- Extending your payment times will reduce your monthly payments. However, it can mean paying more in total interest over time as you pay interest for longer.
- While reducing your interest rate and payment may sound good, you are waiving federal borrower protections if you refinance federal loans.
- Also, no guarantee that you will be approved for a refinance loan.
Other things to keep in mind
Student loan consolidation through refinancing or a direct consolidation loan can impact your credit score.
Additionally, you will have questions about your report if your credit is checked when you apply for a new loan. Keep in mind that too many inquiries can damage your credit score. The good news is that making timely payments for your new loan can help you improve your score again.
From the above, if you are struggling with student debt, know that you are not alone. It is one of the most common types of debt in the United States. But consolidation and refinancing could potentially help make repayment easier.
If you are not comfortable with your current loan situation, consider moving to a new one.
Your new loan may have better terms and could make repaying a lot easier as long as you are careful about who to refinance or consolidate. Make sure your new loan terms are good.
