Over the course of your undergraduate (in addition to any post-graduate) education, your student loan debt is likely comprised of a hodgepodge student loans– in fact, students typically graduate with anywhere from 8 to 12 different loans, according to Mark Kantrowitz, the leading national expert on student loans and publisher of Cappex.com, a website that connects students with colleges and scholarships.
Student loan consolidation is a debt management approach for borrowers interested in simplifying their repayment experience. While it’s a process that takes time and effort, it doesn’t have to be overwhelming as long as you know what to look for.
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Benefits of student loan consolidation
There are a number of benefits to consolidating your student loans, depending on your personal needs. Consolidating multiple student loans into one, new loan gives you the chance to reset your repayment term. This is particularly helpful when your goal is lowering your monthly payment, due to budgetary constraints.
Another perk of student loan consolidation is breaking through the noise of multiple loans (i.e. different interest rates, different due dates, different balances, different minimum payments, different lenders) and packaging those loans into a neat, single payment.
You can combine multiple variable-rate loans, into one fixed-rate loan which provides you a steady outlook of how much you’re spending on your total student loan debt. If you’ve been out of school for a significant time, your matured credit history could qualify you for a lower interest rate, if your original rates were higher.
Most federal student loans are eligible for consolidation through a federal student loan servicer. Some examples of federal student loan types that can be consolidated through the Federal Direct Consolidation Loan process are:
- Direct Subsidized and Unsubsidized Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- Direct PLUS Loans
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Federal Perkins Loans
For a complete list, see your existing federal student loan servicer. It’s important to note that you cannot consolidate a private loan into a federal loan. Private student loans, however, can be consolidated through a private lender in the same way the original private loan was secured.
Disadvantages of student loan consolidation
Sometimes benefits offered by a specific federal student loan are lost in the consolidation process.
Federal Perkins loans lose their subsidized interest if consolidated into a Federal Direct Consolidation Loan.
Mark Kantrowitz, Cappex.com
“Federal Perkins loans lose their subsidized interest if consolidated into a Federal Direct Consolidation Loan,” Kantrowitz said. On the other hand, he noted that Subsidized Federal Stafford Loans do not.
Another significant loss as a result of consolidation happens when you consolidate federal student loans into a private student loan. Flexible repayment options, like income-driven repayment plans, deferment or forbearance of up to three years, and student loan forgiveness programs are no longer protected under a private student loan consolidation.
Unlike federal student loan rates, which are the fixed regardless of your credit score, interest rates on private student loans rely on your credit score. Prime borrowers and cosigners, meaning individuals with very good or excellent credit scores, have the advantage to lock in lower rates, said Kantrowitz. Meanwhile, borrowers who haven’t developed their credit history or have poor credit as a result of missed payments, bankruptcy or default will face more challenges when trying to get approved for student loan consolidation at a competitive interest rate.
How to Consolidate Federal Student Loans
When consolidating your student loans into a Federal Direct Student Loan, you’ll need to go through a few steps.
Step 1: Get an FSA I.D.
Instead of using the Federal Student Aid (FSA) PIN you used when you first applied to the FAFSA for your original loans, federal student loan borrowers are now required to obtain an FSA I.D. It functions the same way as the older FSA PIN, in that it is your personal identifier when trying to access your own federal student aid information or applying for a federal loan online.
You’ll need to enter basic personal information, such as your name, date of birth and Social Security number. Through the process, you’ll also be asked to select and answer five security questions to validate your identity when using your FSA I.D. in the future.
Applying for an FSA I.D. is free using an online form at fsaid.ed.gov.
Step 2: Determine your repayment plan
Before you submit the formal application to consolidate student loans, you should have already assessed which repayment plan suits your circumstances best.
To figure this out, you’ll need to know the full scope of your student loan debt. The National Student Loan Data System can provide you all of the information you need on your existing loans, such as the type of loans, your servicers, interest rates and term lengths.
Once you know which student loans you’d like to include in the consolidation, you can use a repayment calculator tool to help you make an educated decision on which repayment plan to select.
Step 3: Submit an application
Applications can be submitted electronically or on paper via StudentLoans.gov. If you want to mail a paper application through U.S. mail, you can download an application from this site.
You cannot save a partially-completed application and come back to it at a later time, so plan on spending approximately 30 minutes to complete the application in one session.
To successfully fill out the application, you’ll need:
- Your FSA I.D.
- Your personal information
- Your student loan information
During this process, you’ll also be asked to select a servicer among the list of existing federal student loan servicers. Choosing a servicer you already work with could make the process easier, however, you do have the option of choosing a different servicer.
Student loan consolidation has its advantages, but not without sacrificing some benefits as described above. Make sure to do your due diligence when deciding on a student loan consolidation strategy, as some options might not be as lucrative for you as others. If you have questions along the way, contact the federal Loan Consolidation Information Call Center at 1-800-557-7392.