Student Loan Consolidation Guide

The Ultimate Student Loan Consolidation Guide

 Student loan debt is at an all-time high. Currently, 44.2 million borrowers in the U.S. owe $1.3 trillion in student loan debt, according to a recent study by the New York Federal Reserve.

You might be one of these borrowers — heck, most of us are — and perhaps you’re looking for a better solution to pay off those loans quickly and efficiently. If you have more than one student loan, consolidating those loans may help you decrease your monthly payment amount, and it will make the payment process easier.

But is it right for you? We’ve created a comprehensive guide on student loan consolidation to help you make that decision.

Let’s get started.

Student Loan Consolidation Guide – The Basics

When you consolidate your loans, you combine your current federal and private student loans into one loan. The interest rate on all of your existing loans is averaged out to create a new rate.

If you’re having difficulty dealing with the variable rates of some of your student loans, consolidating them will lead to a common fixed interest rate.”

There are two types of consolidation: federal and private, and these two options are quite different from each other (more on that in a bit).

James R. Nowlin, founder and CEO of corporate consulting firm Excel Global Partners, says it’s a good time to consider consolidating if you are struggling to make your student loan payments and if you want to get a fixed interest rate.

Nowlin says, “If you’re having difficulty dealing with the variable rates of some of your student loans, consolidating them will lead to a common fixed interest rate.”

Kevin Walker, head of Education Loans at LendingTree, explains that, in most cases, borrowers must be in repayment to consolidate or refinance their student loans. However, he says that some lenders offer in-school refinance in conjunction with obtaining a new private student loan.

Walker adds, “Borrowers commonly consider refinancing at the time repayment on their student debt begins – usually the fall after a May graduation. Others consider refinancing once they’ve secured a good-paying job, as lenders usually require a decent income as criteria for approval.”

There are consolidation options for federal and private student loans. The type of loans you have will play a huge role in determining the best option for your situation.

Federal student loan consolidation

Federal consolidation is done through the Department of Education and cannot include private student loans. The goal is to simplify your payment process. If you extend the duration of the loan, you may also get lower monthly payments, but that is not the primary goal of federal consolidation.

You are unlikely to save money in a federal consolidation. The Federal Government simply adjusts the terms to make payment easier. The total amount you’ll have to pay in the end will almost be the same.”

Once consolidated, your new fixed interest rate will be the weighted average of your previous rates, rounded up 1/8 of 1%. You’ll also get a new loan term ranging between 10 and 30 years.

Nowlin says, “You are unlikely to save money in a federal consolidation. The Federal Government simply adjusts the terms to make payment easier. The total amount you’ll have to pay in the end will almost be the same.”

He adds that consolidating loans can qualify you for an income-driven repayment plan. “This government program will set a limit on your monthly payments based on a percentage of your income. The length of the repayment term will be adjusted accordingly.”

Here is a list of Nowlin’s pros and cons for federal consolidation:

WEIGH THE PROS AND CONS

Compare the pros and cons to make a better decision.

Pros
  • Guaranteed fixed interest rate.
  • Can qualify you for income-driven repayment plans.
  • You’ll only need to make one payment.
  • The possibility of lower payments.
  • Easier payment scheme allows you to avoid defaulting on your payments.
  • Multiple repayment plans to choose from.
  • Can restart the clock on deferments and forbearance up to three years.
  • You can arrange an automatic debit with your bank, so your consolidated student loan payment is made each month automatically, which could help improve your credit score.
Cons
  • Rounded-up interest rate means you’ll pay more interest over time.
  • Can’t include private loans in the consolidation.
  • You may lose some federal loan benefits.
  • Loss of grace period.
  • No do-overs. Once you’ve consolidated your loans, you can’t break them up again.

The process of federal student loan consolidation

Before you go online to begin the process, make sure you have all of the information about each loan you plan to consolidate. Once you’re prepared, visit the U.S. Department of Education to access an application and begin the process.

You can fill out and submit the application online, or print it out and mail a copy.

After this, the consolidation servicer will consolidate your eligible loans and will be your point of contact for all questions about the process. According to Walker, the process for federal consolidation typically takes 60-90 days. 

It’s important to keep making payments on your current loans until you’ve been informed that you have a new consolidated loan.

Private consolidation

This type of consolidation is done through a private lender, who will combine your student loans into one larger loan resulting in one monthly payment. This can include both federal and private student loans.

Each lender has multiple variations on refinancing offers: multiple years for repayment, fixed vs. variable, co-signed vs. non-co-signed. It’s important to shop around and do your homework before committing to a particular lender.”

The objective is to get a lower interest rate so that you end up paying less in the long run.

As with any private loan, the interest rate will be based on a variety of factors including your credit score, employment history, income, and educational background.

Nowlin lists the pros and cons of this method.

WEIGH THE PROS AND CONS

Compare the pros and cons to make a better decision.

Pros
  • The possibility of lower payments.
  • If you have a co-signer, you can release them from liability.
  • You’ll only need to make one payment every month.
  • Flexible payment terms.
Cons

The process of private consolidation

You first need to research which company will offer you the best terms.

Walkers says, “Each lender has multiple variations on refinancing offers: multiple years for repayment, fixed vs. variable, co-signed vs. non-co-signed. It’s important to shop around and do your homework before committing to a particular lender.”

He adds that refinancing can be faster than federal consolidation and usually takes 15-45 days.

Nowlin suggests these four companies:

Mix and match your type of consolidation

There is a third option for consolidation: a mixture of private and federal consolidation. Walker explains, “Some borrowers consider doing both: consolidate the federal loan debt and refinance the private loan debt.”

When might this make sense?

If you have both federal and private loans right now, you could combine the federal loans through federal consolidation in order to reap the benefits offered by going this route, such as the ability to defer your loan or switch to income-based payments if you suffer a hardship.

Then, you could take the private loans and refinance or consolidate them privately to get a better rate for that set of loans.

Some factors to consider

Consolidate based on interest

If you have a mix of high-interest and low-interest federal loans, consolidate the low interest loans using federal consolidation and refinance the higher-interest loan separately. This way you won’t be stuck with high-interest loans, but your low-interest loan will retain all of the advantages of remaining federal.

Weigh the benefits of fixed rates vs. variable rates

If you choose federal consolidation, you will receive a fixed interest rate for the life of the loan. The advantages of a fixed rate include security — the monthly payments won’t suddenly increase — and the ability to plan and budget knowing the exact rate you’re going to have.

If you have a fairly large loan that will take longer than 10 years to repay, a fixed rate is the better option. Historically, interest rates trend upwards, so you don’t want to get stuck with a really high interest down the road.

Private consolidation, on the other hand, may offer a variable rate loan. The advantage to this is that you might get a lower rate at the beginning.

However, that rate could change depending on current economic conditions so that the rate will become a wild card. If the loan is fairly small, or if you are certain you can repay it in under 10 years, this might be a better option for you.

Student Loan Consolidation Guide – Take action

Nowlin says the process of consolidation is fairly simple once you’ve decided which type of consolidation works best for you and which company you’d like to use (if you choose private consolidation).

He says, “Applying for student loan consolidation usually takes less than 30 minutes. I consolidated all of my student loans from undergraduate studies, one year of medical school, and three years of law school. All you’ll need to do is provide a detailed list of the loans you want to consolidate. Choose a loan servicer, and choose a repayment plan for your new consolidated loan. Don’t overcomplicate the process by overthinking it.”

The good news is, we’ve done most of the initial research for you. To get started finding your best private consolidation options, check out SuperMoney’s student loan review page to compare all the top lenders today.

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