According to the Education Data Initiative, student loan debt has climbed to an astounding $1.75 trillion and is growing six times faster than the U.S. economy.
With the cost of tuition also going up, getting a college education without a loan has become more and more difficult. Most prospective students have no choice but to seek multiple forms of financial aid to pay for their education, which is one of the reasons why the amount of student loan debt has risen dramatically over the years.
Here’s where debt consolidation comes in. Debt consolidation is the process in which multiple loans are combined to create a new loan. This article discusses how to consolidate federal student loans and private student loans.
Types of Student Loans
Generally speaking, students can either take out a federal loan granted by the U.S. government or a private loan granted by a private lender. There are different methods of consolidation for each, so it’s crucial to know which type of loan(s) you currently have.
Federal Student Loans
When you consolidate your federal student loans, some or all of your loans are combined into one single monthly payment. It’s important to note that your interest rate will not change. You may have the option to extend the length of your loan, which can cause your monthly payments to be lower, but you will end up paying more interest over time.
Here are some reasons as to why you might want to consolidate your federal student loans:
- You are in student loan default and want to get caught up on your payments.
- You wish to only pay one monthly payment instead of multiple.
- You need to consolidate in order to be eligible for certain loan forgiveness programs.
You become eligible for federal student loan consolidation once you graduate, leave school, or drop below half-time enrollment.
Private Student Loans
With private student loans, there is a much different process. Instead of consolidating your loans, you can refinance them with a lender. Refinancing involves replacing multiple loans – private, federal, or both – with a single, private loan.
During this process, the lender will take into account your credit score, income, educational background, and other factors to determine your interest rate. If you are in good shape financially, your interest rates may be lowered.
Here are some reasons why refinancing your private student loans may bed a good idea:
- You want to save lower your interest and have a credit score of 690 or higher.
- You have a stable job, which could also lower your interest rate.
- You wish to only deal with one private loan payment instead of multiple.
The goal of refinancing private student loans is to lower your interest rate and combine everything into one monthly payment.
How to Consolidate Federal Student Loans
Luckily, consolidating your federal student loans is pretty straightforward. First, you will want to log into your profile on the Federal Student Aid website and fill out a direct consolidation loan application. From there, you can follow these steps:
Step 1: Make a Selection
You will need to select which loans you want to consolidate and which you do not want to consolidate.
Step 2: Choose a Repayment Plan
You can pick a repayment plan based on your loan balance, or you can select a plan that is tied to your income. If you end up going with a plan that is income-driven, the site will direct you to fill out an additional form.
If you have a large amount of debt and a low income, an income-driven repayment plan could be a great option for you and may drastically lower your monthly payment amounts.
Step 3: Read the Terms and Agree
Once you’ve read through the terms, you can sign off on them online. Be sure to keep making your usual student loan payments until they reach out to you and confirm that your consolidation is complete.
Advantages of Consolidating Federal Student Loans
While the consolidation process is easy enough, it’s important to consider what consolidating federal student loans will affect moving forward. Here are some of the advantages.
1. Convenience
The main benefit of consolidating multiple federal student loans is a matter of convenience. Having one bill in which every loan is combined can greatly simplify the repayment process and can save you from missing a payment on an individual loan you forgot about.
2. Lower Monthly Payment
Another great advantage to consolidating your student loans is that by doing so, you can decrease your monthly payment. Borrowers looking to consolidate their loans essentially restart the length of their loan, allowing them to repay their debt over a longer time frame.
Dealing with Interest
While this can be great if you’re trying to reduce your monthly payment, it should be noted that extending the life of your loan will lead you to pay higher amounts of interest over time.
It is important to consider the monthly savings in comparison to the extra interest that will be paid throughout the extended loan.
If the monthly savings allow you to maintain your monthly budget, then the extra interest paid over the course of many years might not be a problem. This will largely depend on your financial situation and what works best for you.
Disadvantages of Consolidating Federal Student Loans
Having gone over the advantages, there are also some disadvantages to consider.
1. More Interest Over Time
If you decide to consolidate your loan, you will be given the option to extend the loan duration. Extending the length of your loan will result in higher amounts of interest being paid over time.
This could lead you to pay much more than you originally borrowed, which is why it is important to consider the pros and cons when deciding to extend the life of your loan.
2. Loss of Grace Period
Another disadvantage to consolidating your student loans can occur if you decide to consolidate while you’re still attending school. Doing this can cause you to lose the grace period that is offered.
The grace period is usually a six-month period that is granted to borrowers after they graduate. In those six months after graduation, you are not required to make any payments until six months have gone by.
This can be a great benefit to graduates who need time to find a job after completing their education. With that said, students should think twice about consolidating their debt while they’re still attending school.
Federal Student Loan Consolidation Overview
Having gone through the main advantages and disadvantages of federal student loan consolidation, it stands to reason that consolidating student debt can be an excellent opportunity for students to organize their payments into one easy-to-track monthly bill.
There are many consolidation options, with some offering to extend the duration of your loan. While extending a loan’s repayment period can lower your monthly payment, it can also cause you to pay a larger amount in interest over time. However, it is also possible to pay less interest through the consolidation process.
What you do will depend on what works best for your financial situation. But overall, consolidation is a great way to make sure you never miss another monthly payment and can get you to a place where you’re focused and dedicated to paying off the debt, which will greatly improve your credit and overall financial stability.
How to Refinance Private Student Loans
Here are some steps you can take after making the decision to refinance your private student loans.
Step 1: Find a Private Lender
Unlike federal student loans, the Department of Education does not refinance private student loans. However, some private lenders can refinance the loans.
When choosing to go this route, it is important to know that once refinanced with a private lender, you are no longer eligible for student loan forgiveness, public service loan forgiveness, or the income-driven repayment program.
With that in mind, borrowers who rely on federal protection shouldn’t refinance their federal student loans with a private lender if they’re interested in taking advantage of government programs like student loan forgiveness.
When looking into private refinancing, you won’t have to worry about your credit score going down. To find out your potential rate, lenders only conduct a soft-pull inquiry which has no negative impact on your credit score. This is different when you fill out the application, which will result in a hard-pull inquiry that can lower your score.
2. After Pre-Approval, Submit a Full Application and Necessary Income Documentation
If you decide to go forward with private refinancing, you will need to proceed with filling out the full refinancing application. This will take some effort on your end, and you will need to provide the following documentation:
Employment Income Verification
This can be in the form of a paystub that is no older than 30 days.
Self-Employment Income Verification
If you’re self-employed, you will need to provide your last two years of federal income tax returns.
Photo ID
This could include either a driver’s license, passport, or state-issued ID card.
Payoff Statements
Lenders will need to also collect your payoff statement to pay off any existing loan balances that you wish to refinance.
Graduation Verification
This can come in the form of a copy or photo of your diploma or college transcripts.
Once all of these documents are submitted, the private lender will review the information and offer you some options for refinancing. Be sure to make note of the new loan terms and interest rates.
Final Considerations
Having gone over the advantages of loan consolidation, the difference between private and federal loans, as well the private loan refinancing process, it has become clear that student loan consolidation can offer tremendous benefits to borrowers who wish to stay organized and disciplined in making their monthly payments.
While consolidating your loan could result in more interest paid over time, it can also greatly lower your monthly payment. Having a lower payment that is billed in one lump sum every month can be great for those looking to keep track of their loan balance without having to account for every individual loan separately.
Federal Loans Vs. Private Loans
Overall, consolidating federal loans through the federal loan program can be advantageous to those looking to take advantage of the many benefits the federal government provides for student loan debt.
Those who opt to refinance their student loan debt through a private lender might get a better interest rate but will not be able to be eligible for student loan forgiveness, public service loan forgiveness, or the income-driven repayment program.
If you’re a borrower looking to benefit from the federal protections that are available to student debt holders, then you’re better off not refinancing with a private lender.
Consolidate Today
With student loan debt surpassing $1 trillion, there is no better time than now to consolidate your existing student loans. Having an affordable all-in-one payment option can be a great way to stay on top of your debt and not get into a situation where you forget to make a payment because you weren’t able to keep track of the multiple loans you need to pay off.
While student loan debt consolidation can seem intimidating, it doesn’t need to be. There are many resources that you can take advantage of through your financial aid office, as well as through the federal loan program, that can help you begin the process easily.
Those looking to refinance their student loans through a private lending institution will have a little more work to do, but this can also be a great way to pay lower interest over time through a lower refinanced rate.
