Student loan debt can be crushing, especially if you’re a new graduate seeking employment, or a young parent taking time off to raise children. If you have more than one student loan, it can be beneficial to consolidate those loans. But it’s not always a good idea. Learn how to use student loan consolidation effectively.
But what’s the most effective method of consolidation?
Here are some tips on how to consolidate your student loans effectively.
Federal vs. private consolidation
Kevin Walker, head of Education Loans at LendingTree says, “A borrower really has to understand the quirks of each program and make a relatively informed decision. To be honest, most borrowers don’t understand the intricacies of the programs.”
That’s what we’re here for.
Federal consolidation is the process of taking two or more federal loans and combining them into one larger loan. This is a logistical decision more than a financial one and is done through the Department of Education.
You won’t get a lower interest rate via federal consolidation, but what you will get is one simple payment rather than several different payments each month, making your financial housekeeping much simpler.
At one point, says Walker, you could only receive extended repayment on a federal loan if you consolidated your loans, but now you can apply for extended repayment on each federal loan, with no consolidation requirement.
Consolidation may extend your payment period, which could be good or bad. The good part is that it will lower your monthly payments. The bad part is that it could increase the total amount of the loan because you’ll be paying interest for a longer period.
Take a hard look at your situation and determine what is most important to you. For example, you may need a lower payment at this point in your life. And later on, you could make double or triple payments, thus avoiding the problem of paying more over the life of the loan.
Keep in mind, it is easier to make one monthly payment rather than two or more, so consider federal consolidation as a housekeeping solution for your loans.
Private consolidation, more often referred to as “refinancing,” is the process of taking one or more loans — federal or private — and consolidating them into one private loan.
Student loan refinancing is done through a private lender. If you have a good credit score and income, you may be able to get a lower interest rate, hence giving you a lower monthly payment. You’ll also pay less in the long run.
The negative part about consolidating federal loans into a private loan is that you’ll no longer be eligible for all of the perks of a federal loan, including student loan forgiveness and deferment during graduate school or a financially difficult time.
Consider a mix of federal and private consolidation
If you have strong credit and income
“Some borrowers aren’t worried about giving up a lot of the flexible attributes of federal repayment,” says Walker. “They aren’t planning to go back to school, or they have a good job.”
For these people, private consolidation makes sense. They don’t need to defer their loans to return to school; they’re doing well and what’s most important to them is a lower interest rate.
Maybe you’re considering grad school
Private lenders won’t allow you to defer your loans during graduate school, but federal lenders will. So, if you think grad school is in your future, it may be wise to keep your federal loans federal and refinance your private loans (if you have any) through a private lender. This way, at least you’ll be able to stop paying your federal loans during school.
Credit scores will determine your decision
Poor credit doesn’t make a difference if you want to consolidate your federal loans. As long as you haven’t defaulted on a federal loan, you should be able to consolidate these loans no matter how low your FICO score is.
But if you have private loans, your credit score will be important if you want to consolidate.
How low is too low to consolidate?
Walker says, “Student loan refinancing caters to the super prime audience. You’ll need a 680 FICO score or higher to have your refinance accepted in the first place, and you’ll need 760 and higher to get the best rates.”
Find a cosigner?
Walker says if your credit score is lower than 680, you may as well wait on that private loan consolidation, with one exception –“If you can get a cosigner with stellar credit, you can try it.”
Before you get started, remember these four important points:
- If you have a FICO score of 680 or higher, don’t plan on attending graduate school, and have a healthy income, consider private consolidation. It could lower the interest rate you pay on your debt.
- Is graduate school an option? Keep your federal loans federal and consider refinancing any private loans separately if your FICO score allows.
- If you only have federal loans and you want to keep the perks of said loans, then simply consolidate your federal loans to simplify your financial housekeeping.
- If you have only private loans, but a poor credit score, work on raising your score. Then, when it hits the 680 mark, apply for a refi.
To get started finding the top private lenders who specialize in private consolidation, check out our student loans review page.