Consolidate student loans if you want to bundle multiple loans into one new loan. There are two forms of student loan consolidation: federal student loan consolidation and private loan refinancing.
When federal loans are consolidated, the Department of Education issues you a new loan for the amount of your old loans.
- After federal student loan consolidation, you’ll have one single payment and one large loan rather than several loans. It’s not likely the new loan will lower your interest rate. But the amount of time to repay the consolidated loan may be extended beyond what was available in the separate loan programs.
When private loans are consolidated, it’s in the form of refinancing student loans.
- Student loan refinancing can be considered private student loan consolidation. Multiple private student loans as well as federal loans or a combination of the two can be refinanced in one lower rate loan. For most borrowers, refinancing student loans results in money saved.
3 benefits to consolidate student loans with refinancing
1. Save money.
Borrowers with private loans, federal loans or both can benefit when they consolidate student loans by qualifying for a lower interest rate. It’s incredible the amount of money that can be saved with lower interest rates. Thousands of dollars can be saved over the life of the loan. Here is how:
- Let’s say you have $40,000 in student loan with a 10-year repayment plan at 7.00% interest rate. You’d repay a total of $55,732 over the length of the loan. The interest paid is around $15,732 on top of the amount you borrowed.
- But if you refinanced and qualified for a 10-year loan at a 3.50% interest rate, you’d repay $47,465. The interest paid is around $7,465. By starting the process of refinancing your student loan, you’d save over $8,267.
2. Lower monthly payments.
Refinancing student loans can lower your monthly payment if you can qualify for a lower interest rate. Decreasing your monthly payment can give some breathing room to have a little extra money left over at the end of the month. Here is how:
Let’s say your loans total $40,000 with 8 years left to reapy and an interest rate of 7.00%, your monthly payment would be $545. If you qualified to refinance at a 3.50% rate and extended your term to 15 years, your payment would drop to $285. Refinancing, could free-up $285 that could be saved in a high-yield savings account.
3. Get a fixed rate loan.
Some federal student loans have variable interest rates. When variable rates fluctuate, your payments can increase. Fixed rate loans mean your rate will never change and payments stay the same for the length of your repayment. There are no prepayment penalties when you refinance student loans, meaning that if you decide to pay off your loan early there will not be any additional fees or charges to penalize you.
What to consider if you consolidate student loans with refinancing
1. Lost benefits offered by federal loans.
Significant benefits will be lost when borrowers consolidate federal student loans through refinancing. The new private loan will not likely offer the benefits of deferment, student loan forgiveness, or forbearance. If you refinance federal student loans, you’ll lose out on perks such as access to Income-Based Repayment plans and Public Service Loan Forgiveness programs. Any hardship programs offered will be at the discretion of the private lender.
2. Must have decent credit to refinance.
Refinancing is based in part on credit history. People with a minimum 660 credit score and a record of a few on-time student loan payments are better suited for refinancing student loans. Of course you should have a stable job history too. Co-signers are encouraged if your credit or job history is shaky.
3 benefits of federal student loan consolidation
1. Easy qualifying.
Federal loan consolidation doesn’t have a credit score requirement. You can potentially lower payments without having a good credit history. Consolidating your federal loans through the Department of Education is free. You’ll have one single payment and one large loan. The new loan terms will range from 10 to 30 years. Your repayment term will generally start within 60 days of when your consolidation loan is first disbursed.
2. Get a fixed rate.
The interest rate on a Direct Consolidation Loan is fixed, meaning it will stay the same for the length of your loan. To determine your rate when you have multiple federal student loans, the rate is the weighted average of the interest on your current loans rounded up to the nearest one-eighth of 1 percent. The repayment term is determined by the total amount you owe.
3. Student loans in default can be consolidated.
Get back on track and save your credit scores when you consolidate defaulted federal student loans. More than 1 in 10 federal student loan borrowers will default on their loans within three years. To consolidate defaulted student loans you must make three full, on-time, consecutive monthly payments on the defaulted loan. Then you can consolidate your loans into a new Direct Consolidation Loan. As long as you continue making timely payments your credit scores will recover.
4. Steps to consolidate federal student loans.
- Start by going to StudentLoans.Gov. and click on “Complete Consolidation Loan Application and Promissory Note.” You’ll need to gather the documents listed in the “What do I need?” section before you start.
- Choose the loans you want to consolidate.
- Choose a repayment plan. You can either get a repayment timeline based on your loan balance or pick one that ties payments to income.
- If you pick an income-driven plan, you’ll fill out an Income-Driven Repayment Plan Request form next.
- Agree to terms and submit the forms.
- Continue making regular loan payments until your servicer confirms consolidation is complete.
5. Federal loans eligible for student loan consolidation
- Subsidized Federal Stafford Loans
- Unsubsidized and Nonsubsidized Federal Stafford Loans
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Supplemental Loans for Students
- Federal Perkins Loans
- Nursing Student Loans
- Nurse Faculty Loans
- Health Education Assistance Loans
- Health Professions Student Loans
- Loans for Disadvantaged Students
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- FFEL Consolidation Loans and Direct Consolidation Loans (only under certain conditions)
- Federal Insured Student Loans
- Guaranteed Student Loans
- National Direct Student Loans
- National Defense Student Loans
- Parent Loans for Undergraduate Students
- Auxiliary Loans to Assist Students
Federal consolidation combines federal student loans into one new loan, and it lets you choose new repayment terms. But student loan consolidation does nothing to lower your interest rate unless you refinance student loans. With student loan refinancing you may be able to save $1000s of dollars.