Consolidating Student Loans: If you are a student who has either a federal student or private student loan, this might interest you. Juggling multiple loans from different sources can be a big pain, but you do not have to do it forever.
You can look into consolidating your loans into one big loan. You can do this either with a Direct Consolidation Loan for eligible loans or with a refinance loan from a private lender. However, there are pros and cons for consolidating your student loans.
What is Consolidating Student Loans all about?
Consolidation is a way to make repaying student loans more manageable, and possibly less expensive. You combine all your student loans, take out one big consolidation loan and use it to pay off all the others.
In the simplest terms, consolidation student loan 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?
In considering consolidating student loans always think of your payments. If you have missed payments because you struggle keeping up with multiple loan and multiple repayment dates, consolidation is a valid choice.
However, it is 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 refinancing you negotiate a fixed or variable interest rate that should be lower than what you were paying for each loan individually.
- Refinancing, is primarily for private loans and can only be done through private banks, credit unions or online lenders.
- If you borrowed from both federal and private programs and want to consolidate the whole batch it only can be done through a private lender.
Consolidating Student Loans: Merit of Direct Loan Consolidation
There are many good reasons to consolidate through the Direct Loan Consolidation program. They are as follows:
- One payment.
- Avoid default.
- Fixed interest rate.
- Lower payments.
- Multiple repayment plans.
- Deferment/forbearance options increase.
- No minimum or maximum.
- Protecting credit.
- Automatic debit.
- Loan discount.
Consolidating Student Loans: Demerit of Direct Loan Consolidation
There are two sides to every story and here is the other side to consider before going into the Direct Loan Consolidation Program:
- Pay more in interest over time.
- Rounded-up interest rate.
- No private loan consolidation.
- Lose some benefits.
- Lost “grace” period.
- The lender benefits gone.
- No do-over.
Comparing Federal Loan Consolidation with Private Loan Consolidation
1. Federal Loan Consolidation
A Federal Direct Consolidation Loan is available only 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 your new Direct Consolidation Loan. Here the fixed interest rate will be equal to a weighted average of the loans you consolidated.
Also, you cannot include any private student loans in your Direct Consolidation Loan.
Why You Should Consolidate Federal Student Loans
In consolidating federal student loans, taking out a Direct Consolidation Loan makes sense if you want to change the way you are paying back federal student loans.
This Direct Consolidation Loan allows you to change your loan servicer if you are not happy with the company that is currently managing your student loans.
You can also change to a longer repayment plan if you are having trouble keeping up with your monthly payments in some cases. This can go as far as as 30 years.
2. Private Student Loan Consolidation
Private student loan consolidation allows you to combine multiple federal and private student loans into one new private loan. Like Direct Consolidation Loan, you will have one new loan to pay instead of several.
Why You Should Consolidate Federal Student Loans
This can simplify your student loan repayment even further. However, if you pay off federal student loans with a new private refinance loan, know that you are giving up important protections and federal repayment options.
However, unlike a Direct Consolidation Loan, a private consolidation loan does allow you to change your interest rate.
Things to Note While Consolidating Student Loans
While consolidating student loans be informed that:
- Reducing your rate should lowers your overall repayment cost.
- Stretching out your payment timeline will reduce your monthly payments. However, it may mean paying more in total interest over time since you are paying interest for longer.
- While reducing your interest rate and payment may sound good, you do give up federal borrower protections if you refinance federal loans.
- Also, no guarantee that you will be approved for a refinance loan at all.
Other Things to Keep in Mind
Consolidating student loans through refinancing or a Direct Consolidation Loan can have an impact on your credit score.
Also, you will have inquiries on your report if your credit is checked when you apply for a new loan. Please note that too many inquiries can hurt your credit score. The good news is, making on-time payments to your new loan can help you boost 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 consolidating and refinancing could potentially help make repayment easier.
If you are uncomfortable with your current loan situation, consider the possibilities for changing to a new one.
Your new loan could have better terms and could make repayment much easier as long as you are careful about whom you refinance or consolidate with. Please make sure your new loan terms are good ones.