How Does Student Loan Consolidation Work?

Chances are likely pretty high that you have student loans to repay if you have recently attended college. As the cost of attending college rises, fewer and fewer people are able to attend without student loan debt. Unfortunately, student loan payments are still due whether you are able to find a good job after graduating or not. While student loan debt may be inevitable for you, it doesn’t have to hold you back for years as you struggle to make monthly payments. Student loan consolidation is available to help make your payments more manageable. Curious how it works and if it’s right for you? Keep reading to learn more about student loan consolidation.

What is student loan consolidation?

Basically, student loan consolidation is when you combine multiple different student loans into one loan. This one loan pays off all your loans, and then you make one payment each month towards this consolidated loan. This simplifies your monthly payments, and makes it easier to keep track of your loans as you just have one loan payment instead of several.

What types of consolidation are available?

There are two main types of consolidation: federal and private. Each has their own benefits and downfalls, but both are worth considering if applicable to your situation.

Federal consolidation is done through the Department of Education and still allows you to access the repayment options available for federal loans. In fact, some repayment options actually require you to consolidate to be eligible. There is no credit check or certain credit score required to qualify for federal loan consolidation, which can be a huge plus if your credit score is low.

Private consolidation is usually called refinancing, and it means you look to a financial institution or other private lender to consolidate your federal or private loans into one payment. Private loans will look at more factors, including your credit score, to determine your new interest rate. This can either be a benefit or a downfall.

You should consider refinancing if you have a high enough credit score to lower your interest rate, and if you have a steady income that you expect to continue consistently until the loan is paid off. You will usually need to be able to prove you have a steady job and a good credit score to qualify for private refinancing.

How do I consolidate my loans?

The first step is to decide whether you want to consolidate your federal loans with the government or look for a private lender to refinance your loans. If you decide to consolidate your federal loans into one, you’ll simply log into studentloans.gov and apply for a Direct Consolidation Loan. You will select which loans you want to consolidate and choose a repayment plan for your consolidated loan. Your new interest rate will be determined by taking the average rate of the loans you are consolidating and rounding it up to the nearest eighth of a percent.

Refinancing privately is a little more involved. You will first want to look for a lender that can offer you the best rates and is willing to work with you to ideally save you money long term. You will need to apply with the private lender to see what they can offer you, and then determine the right refinancing option for you.

If you have both federal and private loans, or just private, refinancing with a private lender will be the only option available for combining all your student loan payments into one. If you have only federal loans, you can choose between federal consolidation or private refinancing.

How do I know if I qualify?

To qualify for federal student loan consolidation, you will need to be either out of college already or carrying less than a half time class load. Your loans must be either in repayment already or within the grace period to apply for consolidation.

Requirements for qualifying for a private refinancing loan will depend on the lender. In general, you will need a good credit score, generally higher than 670, or a co-signer if your credit isn’t there yet. Some lenders will also require a certain debt-to-income ratio before lending, meaning that your monthly debt payments can’t be higher than a certain percentage of your monthly income to ensure you can easily make your monthly payments.

Should I consolidate my loans?

Student loan consolidation is a great idea if you have multiple loans spread out across multiple providers. Going from multiple payments to just one is convenient, makes it harder to accidentally forget to make a payment, and can ideally save you money over the life of your loan. If you are hoping for federal student loan forgiveness, it is important to know that any progress you have made will be lost if you consolidate your loans as it is technically starting over with a brand new loan.

If you have higher interest loans, that will affect your new loan’s interest rate as it is determined by averaging the rates on all loans being consolidated. This also means that you won’t save any money over time, and can actually end up paying more than you would before consolidating if you aren’t careful.

A private consolidation, or refinancing, does mean that you give up the opportunity to access the options available on federal loans such as loan forgiveness and income-driven repayment plans, as well as deferments if you decide to go back to school. It is nice to have these options to fall back on if something suddenly changes with your financial situation, so that is an important consideration to keep in mind.

Loan consolidation can also offer you longer repayment terms, meaning your payment will be lower each month. However, taking longer to repay your loans means you will pay more in interest, so it’s important to decide whether you would rather save money each month with a lower payment or save money overall by paying less in interest.

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